* 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 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
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
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
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
"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
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
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
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