Phillips 66 has begun shipping crude by rail from North Dakota to a refinery in New Jersey in an effort estimated at more than $1 billion.
The company said this week it has signed a five-year deal with Global Partners to move oil produced in the Bakken shale play to its Bayway refinery.
The Bayway refinery, the largest on the East Coast, is already receiving crude through the deal, which will move 91 million barrels of oil over the contract term, or about 50,000 barrels a day, Phillips 66 spokesman Dennis Nuss said. The refinery is expected to receive crude on a daily basis, except during maintenance or other interruptions in activity, Nuss said.
The oil will be moved by rail from North Dakota to a terminal in Albany, N.Y., where it will be loaded onto barges and shipped down the Hudson River to the Bayway refinery.
Phillips 66 did not reveal the price of the contract.
Based on the cost of shipping oil by rail at that distance and then moving it by barge, estimated at between $13 and $15 a barrel, the contract is likely worth between $1.1 billion and $1.5 billion, said Greg Haas, manager of research at Hart Energy in Houston.
The deal will leave Bayway in a strong position, with a steady stream of crude that is priced well below oil imported to east coast refineries from overseas, Haas said.
“Bayway is going to have strong crude purchasing fundamentals because of this rail deal, in addition to the strong energy price fundamentals,” Haas said.
Haas said Bakken crude was trading Tuesday at around $87 a barrel, which compares to close to $112 for Brent crude, which is used as a benchmark for world oil prices.
If Bakken oil continues to sell at a discount to Brent, the price difference will result in a savings for Phillips 66, even with a shipping fee of as much as $15 a barrel, Haas said.
“This refinery has a pretty positive outlook in my opinion,” he said.
The contract will use Global Partners’ network of loading facilities and offloading terminals, according to a Phillips 66 announcement.
“Global has established a ‘virtual pipeline’ for the reliable transportation of Bakken crude,” said Tim Taylor, Phillips 66’s executive vice president of commercial, marketing, transportation and business development. “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 origin-to-destination supply system to the East Coast.”