The North Dakota crude oil that’s worth less than nothing

HOUSTON (Bloomberg) -- Oil is so plentiful and cheap in the U.S. that at least one buyer says it would need to be paid to take a certain type of low-quality crude.

 

Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it would pay -$0.50/bbl Friday for North Dakota Sour, a high-sulfur grade of crude, according to a list price posted on its website. That’s down from $13.50/bbl a year ago and $47.60 in January 2014.

 

While the negative price is due to the lack of pipeline capacity for a particular variety of ultra-low quality crude, it underscores how dire things are in the U.S. oil patch. U.S. benchmark oil prices have collapsed more than 70% in the past 18 months and West Texas Intermediate for February delivery fell as low as $28.36/bbl on the New York Mercantile Exchange on Monday, the least in intraday trade since October 2003.

 

“Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

 

Flint Hills spokesman Jake Reint didn’t respond to a phone call and email outside of work hours on Sunday to comment on the bulletin. The prices posted by Flint Hills Resources and rivals such as Plains All American Pipeline LP are used as benchmarks, setting reference prices for dozens of different crudes produced in the U.S.

 

Plains All American quoted two other varieties of American low quality crude at very low prices: South Texas Sour at $13.25/bbl and Oklahoma Sour at $13.50/bbl. 

 

Canadian Bitumen

 

High-sulfur crude in North Dakota is a small portion of the state’s production, with less than 15,000 bpd coming out of the ground, said John Auers, executive V.P. at Turner Mason & Co. in Dallas. The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 MMbpd in the past 10 years.

 

Different grades of oil are priced based on their quality and transport costs to refineries. High-sulfur crudes are generally priced lower because they can only be processed at plants that have specific equipment to remove sulfur. Producers and refiners often mix grades to achieve specific blends, and prices for each component can rise or fall to reflect current economics.

 

Enbridge Inc. stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport, such as trucks and trains, according to Auers.

 

Producers outside the U.S. are also feeling pain. The price for Canadian bitumen—the substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline—fell to $8.35 on last week, down from as much as $80 less than two years ago.

 

Negative energy prices are rare but not unprecedented. Propane traded at a negative value in Edmonton, a key pipeline hub in oil-rich Alberta province, for about three months last year. Oil refineries sometimes pay people to take away low-demand products, such as sulfur or petroleum coke, to free up space. However, those are both processing byproducts, while oil is a raw material, according to Auers.

 

“You don’t produce stuff that’s a negative number,” Auers said. “You shut in the well.”