The lack of midstream infrastructure in the Bakken has created a rather large discount between the trading prices of Williston Sweet, WTI, and Brent crude. It's such a significant discount that rail is increasingly being used to transport the Bakken crude to refineries. Just the other day, Phillips 66 (NYSE:PSX) signed a five-year deal to ship the crude to a refinery in New Jersey, despite adding between $10 and $15 per barrel in transportation costs.
This new reality is shared by Continental Resources (NYSE:CLR) President and COO Rick Bott who had this to say in the company's last earnings release:
We've recently seen a significant improvement in Bakken oil price differentials, reflecting higher volumes being shipped by rail to the coasts and the anticipation of increased pipeline capacity ... We now have excess transportation capacity in both pipe and rail, and, with additional infrastructure projects in the planning and construction stages, capacity should remain ahead of Bakken production growth.
The increase in rail capacity is one reason why ONEOK Partners (NYSE:OKS) is going to have to look beyond crude oil as it grows its presence in the Bakken. The company recently announced that it wasn't proceeding with plans to build the Bakken Crude Express as it simply didn't have the long-term volume commitments to green light the project.
Instead, ONEOK Partners and its general partner ONEOK (NYSE:OKE) will focus on relieving the natural gas and natural gas liquids, or NGL, glut that the region is experiencing. Because of the glut, it's estimated that 32% of current natural gas production is flared off (as opposed to just 0.5% in Texas) because of the lack of infrastructure. As the largest independent natural gas processor in the play, ONEOK intends to get that number lower as the gas instead passes through its pipelines.
To do so, the company is investing between $2.1 billion and $2.4 billion in the region through 2014. ONEOK has three natural gas gathering and processing projects coming online in the 2013-2014 time frame. On the NGL side, the company is working on the Bakken NGL pipeline which will be completed in two stages at a cost of $550 million-$650 million. The 600 miles of pipeline connect the Bakken Shale with the Niobrara Shale where it will connect with a planned extension of the Overland Pass Pipeline to the company's recently completed Bushton NGL fractionator in Kansas.
ONEOK might not be helping with the oil glut, but the improved natural gas and NGL takeaway capacity will be important for companies like Kodiak Oil and Gas. While 86% of the company's reserves are oil, that still leaves gas at 14% of reserves. It's ability to market that gas will allow the company to make incremental gas and NGL sales and boost revenue. That'll also flow some incremental revenue to ONEOK's bottom line, which will help the company keep up with its promised 10%-15% annual distribution growth plans.
Matt DiLallo holds shares of Phillips 66. Motley Fool newsletter services have recommended buying shares of ONEOK and ONEOK Partners. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.