So much light sweet crude is coming out of North Dakota's Bakken Shale formation that producers are scrambling to deliver the material to markets. Production has gone from 100,000 barrels a day in 2006 to more than 500,000 barrels a day last year and is projected to eventually exceed one million barrels a day.
Marketers can't build pipelines fast enough to transport the oil, so they are moving big quantities by truck and by train.
"Crude oil has to get out of that region," said Kevin J. Lindemer, a Boston oil analyst. "It has to go by rail because it's pipeline-constrained. So it sells at a steep discount."
North Dakota crude currently sells for about $30 a barrel less at the wellhead than the price of Brent crude, which is currently priced about $120 a barrel. The Brent price is what Sunoco Inc. pays for the oil it imports mostly from Africa to supply its Philadelphia refinery, which the company says it will close on July 1 unless it finds a buyer.
What if Sunoco bought its crude from North Dakota instead?
Actually, it has.
This year, Sunoco and a New Jersey refiner bought shipments of Bakken crude to run through their refineries, according to industry sources. Sunoco officials won't comment on the test, or whether they believe the domestic supply represents a viable long-term alternative that might make the refineries more attractive to operate.
"If you can deliver crude oil to the East Coast by rail and make money, it might work," said Kevin J. Lindemer, a Boston oil analyst.
The trial shipments from North Dakota this year traveled a laborious route to reach Northeast refineries. The oil moved in tankers by rail to Albany, N.Y., where it was transferred to barges and delivered to the ConocoPhillips refinery in Linden, N.J., and to Sunoco's Philadelphia refinery, said Tom Kloza, the editor and publisher of the Oil Price Information service.
In an age of supertankers and underground pipelines, transporting crude oil by rail seems almost quaint, recalling the early days of oil exploration, when drillers literally sold petroleum by the individual barrel.
If the rail transportation system proves workable, logistics experts say that oil would most economically move by 120-car single-commodity "unit" trains directly to refineries, which would need large-scale unloading facilities.
"If it works, the logistics system will adapt," said Lindemer.
Moving oil by rail costs more than pipelines or ships, however. Kloza compares the price difference to the cost of traveling by Southwest Airlines or by limousine between two cities.
But one entrepreneur says it's possible to move crude oil in unit trains to Northeast refineries at a cost of about $12 a barrel, so the oil brought by rail would still be cheaper than the imported stuff.
"With luck you'd get enough to Philadelphia to save those refineries," said Christopher W. Keene, chief executive of Rangeland Energy L.L.C., a "midstream" company that transfers oil from producers to processors. Rangeland is building a large hub terminal in North Dakota to fill 14 rail cars at a time with crude oil.
Keene's company last year agreed to ship 30,000 barrels of North Dakota crude a day by rail to Tesoro Corp.'s refinery in Anacortes, Wash. The Bakken crude will displace about a quarter of the refinery's supply, which now comes from the declining reserves in Alaska's North Slope.
The Philadelphia refinery is the largest plant on the East Coast and can process up to 335,000 barrels a day, a quantity that requires the equivalent of one supertanker of crude oil delivered every three days. It would take nearly 500 rail cars every day to keep the refinery supplied.
"To completely supply a 300,000 barrel-a-day refinery by rail, that would be a hard nut to crack," said Keene.
But the Bakken crude would not have to completely replace a refinery's more expensive supply to improve the plant's profitability. It could be blended with other crude supplies to reduce the average cost per barrel.
Kloza, of the Oil Price Information Service, said there was "no short-term way of getting most of the crude slate switched to Bakken, but everyone is working on it."
Experts expect the difference in prices between mid-continent oil and North Atlantic petroleum will continue for at least five years until pipeline capacity is constructed and market prices equalize.
In order to take advantage of the regional price differences, refiners would have to buy and transport the crude themselves, because entrepreneurs who move the oil across country on their own could sell the crude into the market at prevailing, high prices, said Keene.
There are other complications. Manufacturers can't keep up with demand for new tanker rail cars, which can hold about 680 barrels of oil (28,560 gallons).
"There's been a run on rail cars," said Keene. "Most are leased up, and the lead time on ordering new cars is more than a year."
And a cheaper source of crude oil does not necessarily solve the long-term challenges faced by Sunoco's Philadelphia refinery, as well as the shutdown operations at Sunoco's Marcus Hook plant and ConocoPhillips' Trainer refinery, which are also for sale.
Oil companies say there are too many refineries chasing a shrinking market for gasoline, which is expected to decline as greater fuel efficiency standards go into effect.
"If a refinery closes, it's because there's lower-cost product available," said Lindemer.
Read past coverage of the Sunoco refineries at http://bit.ly/zXGnjB.
Contact Andrew Maykuth at 215-854-2947 or email@example.com, or follow on Twitter @Maykuth.