With low oil prices and producers slashing the rig count in the Bakken shale, it is fair to ask whether crude-by-rail will be able to compete with pipelines in the region. The bottom line is that crude-by-rail is likely to continue playing a vital role in carrying large amounts of crude—more than 700 thousand barrels per day (kbd) or roughly 10 unit trains’ worth per day—out of the Bakken area.
Aggregating the existing crude-by-rail loading facilities and export pipelines in the Bakken area indicates that there are currently approximately 1,360 kbd of rail and 750 kbd of pipeline takeaway capacity (Exhibit 1). Rail capacity could rise to 1,500 kbd over the next three years, primarily from expansion of existing facilities, while pipeline capacity could increase to 1,300 kbd by year-end 2018. In short, the vast majority of potential outbound rail capacity is already “baked in” and pipelines are where capacity could grow sharply if planned projects come through.
Exhibit 1: Bakken Crude Takeaway Capacity
Low-cost, flexible rail is well-suited to operate in a volatile, spot market environment. Pipelines, however, are ill-suited because they are very expensive and need to be run at high-capacity utilization rates to pay back project financing costs. Crude-by-rail loading facilities large enough to load unit trains can be built for as little as $0.6 million per 1,000 barrels per day of loading capacity. In contrast, large long-distance oil pipelines can cost $15 million per 1,000 barrels per day of throughput capacity.
Planned Bakken Pipeline Capacity Is More Exposed to Oil Market Risk Than Rail Terminals Are
Major new pipeline projects are unlikely to come online for at least 18 months, leaving them exposed to oil price volatility and other macroeconomic forces. This in turn raises the risk that the projects could be scaled down, deferred, or possibly even cancelled as a planned 340 kbd line linking the Bakken to Cushing, Oklahoma, was in December 2014.
Pipeline projects moving Bakken crude to the Midwest face three core challenges. First, they take large volumes of oil farther from the West Coast, a significant market for Bakken crude that will expand further once Tesoro and Savage complete their 360 kbd rail unloading terminal in Vancouver, Washington. Second, they add time to—but likely do not sufficiently reduce the cost of—the trip to the East Coast refineries that are the biggest consumers of Bakken crude. Finally, the lines would generally feed into logistical corridors that are oriented toward moving crude oil to the Gulf Coast market, which is already saturated with local light, sweet production and will only become more so as the Permian Basin continues to switch to horizontal drilling and development of multilayer frac plays.
Crude-by-Rail Remains Competitive Despite Low Oil Prices
The North Dakota Pipeline Authority’s estimates of how Bakken and Williston Basin crude gets to market—broken down between pipeline, rail, local refining, and trucking—presents a fascinating and illuminating picture. In early 2012, when the NDPA began tracking shipment proportions, rail accounted for less than 30 percent of crude hauls but rose rapidly over the course of the next year and a half as refiners demanded more supplies of bottlenecked and deeply discounted Bakken crude (Exhibit 2).
Exhibit 2: Modes by Which Bakken/Williston Basin Crude Gets to Market
(percent of total crude oil produced in basin)
Since mid-2013, the pipeline/rail proportion has swung back and forth as the two modes compete with one another for barrels, with relatively more oil traveling out by pipe when WTI crude oil’s price discount to Brent narrows. But even after the oil price crash, rail still carried 58 percent of crude shipments out of the Bakken area in January 2015. Rail’s staying power has been remarkable, driven primarily by the facts that (1) no pipelines exist to carry Bakken crude to East and West Coast refineries, and (2) rail allows refineries a greater range of options for sourcing a variety of crudes on short notice without onerous long-term contracts like those which pipelines would impose.
The Most Competitive Bakken Crude-by-Rail Facilities Will Gain Ground
If oil prices remain low, the most competitive rail loading terminals will be the unit train-capable facilities which are located near the Bakken’s most productive acreage in Dunn, McKenzie, Mountrail, and Williams counties, as well as those facilities with access to gathering pipelines. Direct access to gathering pipeline networks offers key benefits, including lower gathering costs, higher efficiency, less exposure to severe winter weather that can disrupt trucking operations, and greater ability to monitor and control the quality of crude oil headed into the facility. Facilities that score high on these metrics include Crestwood Midstream Partners’ COLT Hub, EOG Resources’ Stanley terminal, and BOE Midstream’s Dickinson terminal.
Bakken Crude-by-Rail Is a Long-Term Proposition
A top refining executive’s recent public statements suggest an optimistic future for crude-by-rail from the Bakken. Thomas O’Malley, the executive chairman of PBF Energy, which accounts for nearly 30 percent of U.S. East Coast refining capacity, said in the company’s October 30, 2014, investor call that he believes rail out of the Bakken is a “long term operation” and that “rail is going to be a long term proposition to the US East Coast.”
 Sandy Fielden, “Crude Loves Rocking Rail – Plains, Enbridge and Global Terminals in the Bakken,” RBN Energy, February 26, 2013, https://rbnenergy.com/plains-enbridge-and-global-terminals-in-the-bakken (accessed March 26, 2015)
 “U.S. crude oil pipeline projects: Kinder Morgan acquiring Hiland Crude,” Reuters, January 21, 2015, http://www.reuters.com/article/2015/01/21/us-usa-pipeline-oil-factbox-idUSKBN0KU2SX20150121 (accessed March 26, 2015)
 Robert Tuttle and Lynne Doan, “Enterprise Halts Plan for Bakken Oil Pipeline as Prices Collapse,” Bloomberg, December 12, 2014, http://www.bloomberg.com/news/articles/2014-12-12/enterprise-halts-plan-for-bakken-oil-pipeline-as-prices-collapse (accessed March 26, 2015)
 Amy M.E. Fischer, “Vancouver extends moratorium on crude oil facilities,” The Columbian, March 2, 2015, http://www.columbian.com/news/2015/mar/02/vancouver-extends-moratorium-crude-oil-faciliti/ (accessed March 26, 2015. Note that the Tesoro/Savage terminal is under review by the state of Washington and is not affected by the local moratorium on additional crude-by-rail projects)
 For county-level oil production data, see “ND Historical Barrels of Oil Produced by County,” North Dakota Department of Mineral Resources, https://www.dmr.nd.gov/oilgas/stats/countymot.pdf (accessed March 26, 2015)
 Company 3Q2014 Earnings Call Transcript, available from SeekingAlpha. For refinery capacity estimate, see “Weekly Inputs and Utilization: PADD I,” Energy Information Administration, http://www.eia.gov/dnav/pet/pet_pnp_wiup_dcu_r10_w.htm (release date March 25, 2015) and “Refineries,” PBF Energy, http://www.pbfenergy.com/refineries (accessed on 26 March 2015)