Phillips 66, the refining and chemicals group spun off from ConocoPhillips in May, is ordering 2,000 rail cars to transport crude from the North Dakota oilfields to its refineries on the east and west coasts of the US, in a sign of how the boom in onshore oil production is shaking up the American energy industry.
Greg Garland, Phillips’ chief executive, told the Financial Times that the company was planning to buy the cars for a total price of about $200m, to enable it to carry up to 120,000 barrels per day of cheaper crude available in the central US.
Phillips believes it will be more cost-effective for its refineries in California to transport oil more than 1,500 miles by rail than to buy it on international markets.
Other US refiners such as Tesoro have also been buying more rail tank cars in recent years, but Phillips’ order is one of the largest.
“If you go in with an order for 500, they put you in line. If you go in with an order for 2,000, you get people’s attention,” Mr Garland said.
North Dakota has this year overtaken Alaska and California to became the second-largest state in the US for oil production, after Texas, with output of 575,490b/d in March, according to state data. Advances in hydraulic fracturing and horizontal drilling have opened up large reserves that could not previously be extracted at economic rates.
The rise in onshore production has exceeded the pipeline capacity available to carry oil to the coast, opening a persistent price gap between US onshore oil such as benchmark West Texas Intermediate and international crudes such as Brent.
On Thursday WTI was about $85 per barrel, while Brent was about $100.
As a result, the financial performance of refineries in the central US with access to oil from North Dakota and Canada had been “just outstanding”, Mr Garland said, but refineries on the east and west coasts that use international crudes had been “struggling”.
Shortly before the split, ConocoPhillips sold an east coast refinery, Trainer in Pennsylvania, to Delta Air Lines.
The outlook for the US petrol market, where demand is expected to be flat to declining in the long term, means that Phillips’ priority is to run its refineries well.
Mr Garland said: “Crude is 85 per cent of the cost of gasoline, so you’ve got to work on that. That’s the biggest lever we have.”
Moving oil by rail is generally more expensive than using a pipeline, but Phillips thinks that for the foreseeable future there will be no pipes built to connect North Dakota to its refineries in California, Washington state and New Jersey, and the crude price gap is likely to persist.
Buying rail cars also gives it the flexibility to draw on new sources of crude such as Colorado, seen as likely to be one of the next states to experience an oil boom.