Hess, Musket Turn to Railroads to Ship Bakken Crude to Market

Crude producers such as Hess Corp. and distributors including Musket Corp. are turning to railroads to ship oil from North Dakota as production from the Bakken Shale formation rises faster than pipelines can be built.

North Dakota crude output jumped 83 percent to 329,000 barrels a day in August from two years earlier, according to the latest state-level data from the Energy Department.

“Rail can jump in at a lower cost,” said Dan House, general manager of crude by rail at Musket Corp., during a talk at the Argus Americas Crude Summit in Houston. Access to refiners can make it a “long-term solution as well.”

There is capacity to ship about 125,000 barrels a day of oil out of the Williston Basin area, according to House. The basin covers parts of North and South Dakota, Montana and Saskatchewan. That capacity is poised to double or triple in the next two to three years, according to House.

Hess Corp. is building a rail station that will give it the ability to ship 130,000 barrels of crude a day from the Bakken fields, according to Wynne Harvey, senior manager of crude oil marketing at the New York-based company. He also spoke at the Argus conference.

Hess plans to more than triple its Bakken crude output in the next five years to 80,000 barrels a day from the current 25,000.

Output Rises

U.S. crude production increased 20 percent to 5.62 million barrels a day in October from two years earlier, according to the Energy Department. Oil from the Williston Basin will help account for nearly 1.2 million barrels a day, or 15 percent, of U.S. output by 2015, analysts from Raymond James said earlier this month.

Pipeline operators including NuStar Energy L.P. and Kinder Morgan Energy Partners LP are also investing in railway infrastructure to ship crude from new production sites to trading hubs as terminal operators boost storage capacity.

Kinder is investing up to $150 million in Watco Companies Inc., the largest closely held short-line railroad company in the U.S., the pipeline operator said in December. Short-line railroads typically link customers, such as crude oil producers, to main rail lines. NuStar began shipping Bakken crude by train from North Dakota to its terminal in St. James, Louisiana, in April.

Terminal operators including Plains All American Pipeline LP, The Gavilon Group LLC and Magellan Midstream Partners LP have announced plans to build 14 million barrels of new oil storage capacity at Cushing, Oklahoma, by the end of 2011. That would boost capacity as much as 25 percent at the biggest U.S. crude-trading hub, from the existing 55 million barrels.

To contact the reporter on this story: Aaron Clark in New York at aclark27@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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