Will a New Washington State Law Hurt Bakken Crude Oil Producers?

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Will a New Washington State Law Hurt Bakken Crude Oil Producers?

Refineries in Washington state have been reliable buyers of Bakken-sourced crude oil during the Shale Era, receiving an average of about 145 Mb/d — all of it by rail — over the past two-plus years. But a newly approved Washington law slashing the allowable vapor pressure limit for crude being unloaded from rail tank cars could hinder future growth in crude-by-rail shipments from North Dakota to the Evergreen State, or force Bakken producers to remove more butane and other “light ends” from the crude oil they rail west. It’s such a big deal that the state of North Dakota has indicated it will file suit to kill the new law. Today, we discuss Washington’s new law and its potential effects on Bakken crude oil producers.
Besides long borders with Canada, the states of Washington and North Dakota don’t have a heck of a lot in common. Washington is known for its high technology (Boeing, Microsoft and Amazon) and coffee (Starbucks, and Seattle has one of the highest coffee-shops-per-capita ratios of any city), while North Dakota’s claims to fame are its wheat fields, “Fargo” (the movie, not the city) and, yes, the Bakken — one of the nation’s largest oil and gas producing areas. Still, there’s been a consistent link between the two states in recent years: Since the mid-2010s, Washington’s refining industry (combined capacity, about 660 Mb/d) has been counting on Bakken crude for more than one-quarter of its needs.

until the Shale Era, Washington’s five refineries (red dots in Figure 1) relied primarily on Alaska North Slope (ANS) crude oil shipped down from Valdez, AK, as well as waterborne imports, and piped-in crude from Western Canada. The Western Canadian crude is sent from Edmonton, AB, via the Trans Mountain Pipeline (hot-pink line) and the connecting Puget Sound Pipeline (green line) to four refineries in the Puget Sound area.

 

 

 

When shale production took off in the Bakken in the early 2010s, there was far too little pipeline capacity out of western North Dakota to move all those light, sweet barrels to market. It would take time to develop new pipelines, so a number of midstream and logistics companies quickly developed rail-loading terminals in the Bakken. Crude-by-rail volumes soared; by the end of 2014, more than 700 Mb/d of Bakken crude was being railed out in almost every direction — one-fifth of it (about 145 Mb/d) to Washington state refineries. Over the following four-plus years, while the volumes railed to the East and Gulf coasts waxed and waned, Bakken-to-Washington volumes stayed steady. According to the Washington Department of Ecology (WDOE), refineries in the state have unloaded an average of about 145 Mb/d of Bakken crude over the past two and half years; the green bars in Figure 2 show the 10 quarter-by-quarter averages. And in the three quarters since mid-2018 (dashed orange oval), crude-by-rail volumes from the Bakken to Washington have averaged a strong 165 Mb/d, even as overall volumes of Bakken crude railed out of the play have declined to less than 300 Mb/d. (That 165 Mb/d represents about 12% of current Bakken production levels of 1.4 MMb/d.) Also, a few thousand barrels per day of Alberta crude (some heavy and some light) are typically railed in from Western Canada.

Figure 2. Crude-by-Rail Volumes from the Bakken to Washington Refineries. Source: WDOE (Click to Enlarge)

Crude from the Bakken is transported on rail lines that enter east-central Washington from Idaho near Spokane, then turn south, run along the Columbia River (the Oregon/Washington border), and head north to the Puget Sound area. (The Figure 3 map shows the estimated number of tank cars that moved through sections of this route in the first three months of this year.) Along this last, northbound run, crude is delivered by rail to TrailStone’s 42-Mb/d US Oil & Refining refinery in Tacoma; Marathon Petroleum’s 110-Mb/d refinery in Anacortes; Phillips 66’s 121-Mb/d refinery in Ferndale; and BP’s 236-Mb/d Cherry Point refinery in Blaine. (Washington’s fifth refinery — Shell’s 150-Mb/d Puget Sound facility, also in Anacortes — has no rail unloading equipment and receives all of its crude by tanker or by pipe; Shell tried to develop a rail facility mid-decade but abandoned plans for it in October 2016.) According to the WDOE, crude-by-rail deliveries accounted for 27% of crude deliveries to refineries in Washington in the first quarter of 2019, compared to 28% for pipelines and 45% for tankers.

Figure 3. Bakken Crude Oil Tank Car Volumes, First Quarter of 2019. Source: WDOE (Click to Enlarge)

Now that we’ve established the significance of railed-in Bakken barrels to Washington refineries, we’ll discuss the state’s newly approved — and controversial — law (best known as SB 5579) and its potential impact on future crude-by-rail shipments. Citing safety concerns about the relatively high vapor pressure in tank cars out of the Bakken (versus other production areas in the U.S. and Canada), Washington’s state legislature in late April gave final approval to a bill (SB 5579) to limit the volatility of the railed-in supply, and the measure was signed into law by Governor Jay Inslee on May 9. The law sets a vapor limit of 9 pounds per square inch (psi) for crude unloaded from trains. That is considerably more stringent than the federal limit of 14.7 psi and the North Dakota cap of 13.7 psi. North Dakota implemented that limit — 1 psi lower than the national standard as an extra precaution — in April 2015 when concerns about the volatility of crude-by-rail shipments reached a fever pitch after the July 2013 oil-train disaster in Lac-Mégantic, QB, which involved a train carrying Bakken crude. Then, the July 2016 derailment (in Mosier, OR) of an oil train transporting Bakken crude to the TrailStone refinery in Tacoma only heightened concern among many Washington state legislators.

Importantly, during the legislative process in Washington’s state capital — and in response to lobbying by the Western States Petroleum Association (WSPA) and others — SB 5579 was amended so that the new law only applies to (1) newly built refineries in Washington and (2) existing refineries in the state that increase the volume of crude they receive by rail by more than 10% from what they received in 2018. In the latter case, if, say, Refinery X unloaded 10 MMbbl of crude last year and 12 MMbbl in 2019, the 9.0-psi vapor pressure limit would kick in two years after the end of 2019 — that is, on January 1, 2022. (The original version of the bill would have required that all existing refineries — and any new ones — comply with the 9.0-psi limit immediately.) There would seem to be at least a chance that the 2019 volumes railed to one or more Washington refineries will rise by 10% or more from last year — in the first quarter of 2019, 15.9 MMbbl was sent by rail to Washington refineries, which is 18% higher than the 13.5 MMbbl railed in the first quarter of 2018 and 7% higher than 2018’s quarterly average (14.9 MMbbl).

In any case, North Dakota officials and the North Dakota Petroleum Council have said they strongly oppose the new law, and the North Dakota Industrial Commission (NDIC), composed of the state’s governor, attorney general and agriculture commissioner, has indicated that it expects to file a lawsuit in federal court to block the law’s implementation. We understand that the NDIC will argue that the provisions of SB 5579 pre-empt federal authority and violate the Interstate Commerce Act. The root of North Dakota’s concern is that lowering the allowable vapor pressure for crude oil transported by rail would require the removal of relatively volatile light-end products such as butane from crude before it is loaded into tank cars. Separating out these light ends prior to loading would require more processing (and equipment and expense) within the Bakken; besides, removing butane, which is needed as an additive for winter gasoline blends, would make the crude less desirable to Washington state refiners. In other words, if the new Washington state law stands and the 2019 crude volumes railed into one or more Washington refineries increase by 10% or more from last year’s level, Bakken producers and shippers would take a financial hit.

SB 5579 is only one example of state laws that can have a significant effect on oil and gas production, transportation and other issues — a recently enacted Colorado statute that (among other things) gives localities more control over well setbacks is another example we’ll consider in an upcoming blog.