UPDATE 2-Phillips 66 makes $1 bln commitment to ship Bakken crude

Tue Jan 8, 2013 2:03pm EST

* Phillips commits to move 50,000 bpd Bakken oil to NJ

* 5-yr commitment the longest crude-by-rail deal so far

* Global to ship crude via Canadian Pacific's railway

By Selam Gebrekidan

NEW YORK, Jan 8 (Reuters) - Phillips 66 said on Tuesday it entered a five-year commitment to ship North Dakotan crude oil by rail to its New Jersey refinery, making an estimated $1 billion bet that North American crude will remain cheap.

Under the terms of the contract to use Global Partner LP's loading facilities and terminals, Phillips 66 will receive some 50,000 barrel-per-day of Bakken crude oil at its 238,000 bpd Bayway refinery in Linden, New Jersey, on a take-or-pay basis, equal to 91 million barrels over the five-year period.

Global LP said it will load the Bakken crude shipments at Basin Transload LLC's rail facilities in North Dakota and ship it to its terminal in Albany, New York, on Canadian Pacific's rail network.

The Houston, Texas-based refiner's commitment only covers a fraction of the cost of moving oil by rail. Phillips must also pay the train operators that transport the crude as well as cover the cost of buying or leasing tank cars.

Oil traders estimate it costs between $12 to $16 a barrel to transport Bakken crude from North Dakota to the U.S. Northeast. Even if long-term agreements resulted in some discounts, the total commitment Phillips 66 is making to move Bakken crude likely exceeds $1 billion.

Both companies declined to comment on the financial terms of their deal.

"Our five-year agreement with Global assures us long-term access to advantaged crude for our Bayway refinery through what we believe is a cost competitive ... system," Tim Taylor, Phillips 66 executive vice president for commercial, marketing, transportation & business development said in a statement.

The latest commitment furthers Phillips 66's plan to tap more cheap inland U.S. crude at its refineries. The company has ordered 2,000 railcars, which it will begin receiving early this year.

Phillips 66 Chief Executive Greg Garland told Reuters last year that his company could increase the amount of Bakken crude it processes at the Bayway plant to 100,000 bpd. The refinery already processes 30,000 bpd to 40,000 bpd of cheaper Bakken crude delivered via rail.

Refinery analysts noted the five-year commitment is the longest crude-by-rail deal to emerge since the shale revolution upended U.S. domestic oil production in the last few years.

"It is almost like a pipeline deal and that's no surprise because rail is the way Bakken crude will move to the East Coast for an extended period of time," said John Auers, senior vice president of refinery specialist Turner, Mason & Company in Dallas.

Waltham, Massachusetts-based Global can rail up to 160,000 bpd of crude to its Albany terminal, and expects to use 100,000 bpd of that capacity in January, the company said in a statement.

BAKKEN ECONOMICS

The Bakken shale produced more than 682,000 bpd of oil in October, more than OPEC member Ecuador. Its output has doubled in the last 16 months alone, as energy companies unlocked massive oil reserves trapped in its shale rock using horizontal drilling and fracking technologies.

Slightly more than half of that output was shipped to market on rail cars as the addition of new pipelines lagged far behind the explosive growth in production, according to the North Dakota Pipeline Authority.

In fact, U.S. rail shipments of crude oil tripled last year, compared with a year ago, as producers sought more lucrative markets for the surplus accumulating in the U.S. Midwest. Reuters calculations based on data from the Association of American Railroads shows U.S. oil shipments topped 200,000 rail cars in 2012.

Even with $16-a-barrel paid to transport it to the East Coast, Bakken crude still costs less than crudes priced against European Brent. This is a relief for companies like Phillips 66, which is among the struggling U.S. East Coast refiners gunning to bring cheap inland crude to their plants after expensive foreign oil imports squeezed their profit margins.

Cheap crude from North Dakota and Texas has rescued those refiners left standing after the spate of shutdowns and sell-offs that changed the East coast energy landscape last year. Even Phillips 66's predecessor ConocoPhillips was forced to sell the 185,000-bpd Trainer, Pennsylvania, to a Delta Air Lines subsidiary.

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