Energy News: Development of New Markets for Uinta Basin Crude via Rail

By David Tabet

From 2006 to 2013, U.S. annual oil production increased over 48% from 1830 million barrels (bbls) to 2716 million bbls. Similarly over the same period, Utah’s annual oil production jumped 59% from 22 million bbls to 35 million bbls, mainly from the Uinta Basin of northeastern Utah. This rapid increase in Uinta Basin oil production has taxed the ability of its typically sole market at Salt Lake City refineries to absorb the extra oil.

Another problem is that Uinta Basin crude is “waxy” and solidifies at normal outside temperatures to the consistency of shoe polish, which makes transport via pipeline impossible unless the pipeline is heated and insulated. To find new out-of-state markets for Uinta Basin crude oil, producers there have recently started shipping their product to other states in heated and insulated rail tank cars.

The transport of Uinta Basin crude oil by rail to markets outside Utah started significantly in 2013, when a temporary shut-down of a Salt Lake City refinery briefly caused a local glut of oil. Uinta Basin oil producers such as Berry/Linn Petroleum, Crescent Point Energy, Newfield Exploration, and Ultra Petroleum responded by shipping their crude oil out-of-state in coil-heated and insulated tank cars.

Historically, Uinta Basin waxy crude has been captive to the refineries around Salt Lake City, and was sold at a discounted price of about $13 to $17 per bbl less than oil from other areas in the U.S. Recently, the price differential has been high enough that even with the extra rail transportation costs, Utah oil could be shipped to other higher priced U.S. market areas at a profit.

One such nearby market is California. While recent overall U.S. and Utah oil production was increasing, oil production in California was generally declining to flat. In addition, oil production from Alaska, a major supplier to California refineries, has been in steady decline since 1990. Significant domestic rail imports of crude oil to California began in mid-2010, first mainly from North Dakota, but since then rail-based oil shipments have come from other places such as Canada, New Mexico, Oklahoma, and Texas.

Rail shipments of Utah crude to California began in July 2013 at about 11,000 bbls, and have grown to over 100,000 bbls in September 2014. In May 2014, Arc Terminals in Portland, Oregon, reported that it had begun accepting rail shipments of oil from Utah under a contract with Chevron, but the volume was not disclosed. Oregon has no refineries so the oil was likely transferred onto ships or barges for delivery to another West Coast refinery.

Various alternatives to trucking crude oil out of the Uinta Basin are being considered. In February 2014, Tesoro Corporation, which owns one of the Salt Lake City oil refineries, announced a proposal to build a heated, insulated pipeline from the basin to Salt Lake City. In June 2014, a feasibility report prepared for Duchesne and Uintah Counties was released for a new 100-mile rail line into the Uinta Basin to connect businesses and industries there directly with interstate rail lines.

Both of these proposed projects are having Environmental Impact Statements prepared to determine their environmental feasibility and are at least several years away from inception. In the meantime, crude oil has begun to be trucked to rail terminals outside the Uinta Basin for shipment via rail to markets outside of Utah.

To ship Utah crude oil by rail, six new Utah-based oil transloading terminals have been constructed: (1) Musket Corporation near Helper in June 2010; (2) Newfield Exploration in Ogden in March 2013; (3) and (4) Savage Services in both Salt Lake City and Wellington in August 2013; (5) Crescent Point Energy in Salt Lake City in December 2013; and (6) Price River Terminal in Wellington in December 2013. These new terminals supplement an existing oil terminal built by Chevron Corporation in Salt Lake City in the 1980s.

These transloading facilities accept truck shipments and transfer the oil into rail tank cars for transport to out-of-state markets. As of early 2014, these seven oil transloading terminals had a combined capacity of over 50,000 bbls per day, or roughly equivalent to the current Uinta Basin “waxy” crude oil refining capacity near Salt Lake City (total refinery capacity is about 173,000 bbls per day). The actual amount of crude oil shipped out of Utah by rail is difficult to determine, but for 2014 will probably be close to 0.9 million bbls, or about 2.3% of Utah’s 2014 crude oil production.

New U.S. Department of Transportation collision strength and safety standards for oil railcars, released in July 2014, may dampen rail oil traffic temporarily until sufficient new or retrofitted car capacity is available. Once the temporary, sturdier, railcar shortage is overcome, the various oil transloading terminals will provide ample new markets for Uinta Basin waxy crude oil via rail, perhaps eventually capturing up to half of Utah’s annual oil production.

Survey Notes, v. 47 no. 1, January 2015