Phillips 66 has signed a five-year commitment to ship North Dakotan crude oil by rail to its New Jersey refinery, making an estimated $1bn bet that North American crude will remain cheap.
Under the terms of the contract to use Global Partner’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, according to Reuters.
Global said it will load the Bakken crude shipments at Basin Transload’s rail facilities in North Dakota and ship it to its terminal in Albany, New York, on Canadian Pacific’s rail network, Reuters reported.
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 US Northeast, according to the news wire. Even if long-term agreements resulted in some discounts, the total commitment Phillips 66 is making to move Bakken crude likely exceeds $1bn.
Both companies declined to comment on the financial terms of their deal, Reuters said.
“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.
Phillips 66 has ordered 2000 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 US 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.