PBF Energy (NYSE: PBF) Signs Bakken Oil Supply Agreement

Brian Hicks

Written By Brian Hicks

Posted April 16, 2013

PBF Energy Inc. (NYSE: PBF) announced last Wednesday that it has reached an agreement with Continental Resources (NYSE: CLR), under which PBF will receive crude oil from Continental’s Bakken shale supply. The crude oil will be delivered by rail to PBF’s refinery in Delaware City, DE.

This is the latest effort to boost struggling East Coast refineries in relation to the oil boom taking place in the U.S. Midwest.

PBF Chief Commercial Officer, Don Lucey said in a press release:

“We are pleased to be working directly with Continental Resources, a leader in domestic crude oil production and a major producer and supplier in the Bakken play. We look forward to growing our relationship with them.”

Continental Resources is the Bakken’s largest leaseholder and producer, where it exploits its crude oil from the complex shale rock formation with modern drilling technologies. It supplies its oil to refiners on the West Coast, and the Gulf Coast, and now with this latest agreement, the East Coast, as PBF’s press release states.

Bakken Oil RIgPBF is one of North America’s largest refineries, with operations in Delaware City, Delaware; Paulsboro, New Jersey; and Toledo, Ohio.

This move comes at an opportune time for PBF, who in February announced that a second rail unloading facility had been completed at its Delaware plant.

The volume of Bakken crude PBF would purchase from Continental through this deal was not made immediately available in Wednesday’s announcement; however, PBF’s new rail unloading facility has the capacity to take on roughly 70,000 barrels per day (bpd) of lighter crudes from the Bakken shale. Another 80,000 or so will come from sulfur-rich crude supplied by Canada’s oil sand region, according to Delaware Online.

This will help fulfill the 190,000-barrel-a-day refinery in Delaware City that historically had turned to importing its crude supply from more expensive foreign suppliers.

Crude by Rail

PBF is making significant strides in support of its infrastructure to ensure a secure and beneficial position with the more cost effective crude being produced closer to home.

PBF’s Chief Executive Officer, Tom Nimbley, said in the press release:

“PBF has made significant investments in acquiring rail cars and developing our East Coast rail delivery infrastructure to increase our access to North American crude oil, which positions PBF to benefit from these cost-advantaged crudes. Delaware City’s heavy and light crude rail discharge facilities allow us to work directly with producers in Canada and the Mid-continent, like Continental Resources, and provide us with a competitive advantage versus northeast refiners that rely on third parties to deliver North American crude oil.”

Traditionally, East Coast refiners would turn to imports from West Africa and the North Sea and were placed at a competitive disadvantage to their brethren in the Midwest and Gulf Coast. And the simple reason for this was lack of infrastructure.

It hasn’t always been a big issue, but as the oil boom surged on, costs were driven down for Midwest and Gulf Coast plants, while those on the East Coast — with no pipelines to rely on — were forced to pay more to import oil.

In the past couple years, several East Coast plants have had to shut down; those that survive are doing so by strengthening their rail infrastructure and reaping benefits from the Bakken and Canada.

Time for Domestic

This breakthrough with the East Coast’s PBF is great news for the domestic use of Bakken oil. Now a direct, working relationship can be formed with producers from the region and refiners to the right; production can take place at its capable levels and costs can go down for East Coast refiners, all while keeping oil trade within the continent.

And with as much oil as the Bakken is capable of recovering — a dumbfounding 503 billion barrels — it’s important to have as many outlets to turn to as possible, especially on the home front.

And if production is to be maximized, modern drilling techniques like horizontal drilling must be utilized. Horizontal drilling is so advantageous because it maximizes results, saving time and money.

In conventional vertical drilling, as many as three quarters of all wells drilled will prove unsuccessful or dry. On the other hand, horizontal drilling passes through many fractures in the rock formation, so the odds of that well coming up dry are significantly lower.

Essentially, you’re looking at a success rate of 25 percent (and that’s generous) for vertical wells, compared to about a 95 percent success rate for the horizontal method.

Let’s Drill

It really all took off when Halliburton (NYSE: HAL) decided to invest in a limited number of drilling programs in the Bakken. By 2000, the operation was underway, though it took a little while for the company to get the drilling technique down.

Soon enough, however, success reached attention-grabbing levels. U.S. oil would never be the same; world oil, for that matter, would never be the same.

Once word of Halliburton’s success caught fire, all the other companies came swooping in, and the rest is history.

Today, each well drilled in the Bakken could produce as much as 600,000 to 700,000 barrels over its lifetime.

North Dakota alone is pumping out around 768,000 barrels a day right now and has over 3,000 working wells. It’s unprecedented how much the region has transformed.


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