Blockbuster Bakken Deal Means More Oil for Traders

A $6 billion takeover to create the biggest oil producer in the Bakken shale may also open up new opportunities for some big traders who ship oil from North Dakota and Montana to market.

Over the weekend, Whiting Petroleum Corp said it would acquire Kodiak Oil & Gas Corp, creating a company that pumped some 107,000 barrels per day (bpd) in the first quarter, or about one in every 10 barrels of Bakken crude.

Like most producers in the Bakken, neither firm delivers its crude directly to a refiner's front gate, relying instead on logistics or trading companies with access to pipelines, oil terminals or rail cars to buy the crude near the wellhead and transport it hundreds or thousands of miles.

Whiting has preferred to sell its over 75,000 bpd of oil production to middlemen who can then ship the crude to the highest-priced market, with Plains Marketing LP, Shell Trading and privately held Dallas-based Bridger Trading among its biggest buyers, according to its filings with the U.S. Securities and Exchange Commission.

Kodiak also sells its over 30,000 bpd of oil output at the wellhead, but most often to refiners such as Tesoro Corp , which owns a refinery in North Dakota and another in Washington state, and Valero, which take it directly to their plants, according to a person familiar with the company's sales. Both refiners declined to comment on their suppliers.

With the deal, Kodiak's relatively small slice of Bakken may now be able to reach a wider variety of buyers, according to the person. That may also reduce its exposure to the volatile price discounts that arise in the region due to a lack of adequate access to pipelines, the cheapest form of transport.

Last year, differentials on Kodiak's oil sales varied from $2.60 to $15.94 a barrel, according to its filing.

Whiting's larger size may give Kodiak options for crude transportation that it does not currently have, said Whiting spokesman Eric Hagen. Whiting will continue to rely largely on third-party marketers, he said, but with a preference for shifting more supplies to pipelines such as Sandpiper, a new line being built by Canada's Enbridge Inc.

In turn, Whiting may also gain access to the Pony Express pipeline, which is due to start up in the coming months. The pipeline can carry up to 320,000 bpd from Wyoming and connects into the Cushing, Oklahoma, pipeline hub. Over 85 percent of Kodiak's output is pumped into a local gathering pipeline system, which may ultimately flow toward the Pony Express.

PLAINS, SHELL, BRIDGER

Whiting, one of the early drillers in the Bakken, has long relied on marketers and middlemen to get its crude to end-users.

Last year, for instance, it sold 21 percent of its oil, natural gas liquids and natural gas output to Plains Marketing, a unit of Plains All American, which owns two oil rail terminals and a pipeline system in the Bakken. It sold another 14 percent to the trading arm of Royal Dutch Shell (RYDAF), according to its annual SEC filing.

Another 11 percent went to Eight-Eight Oil Company, a privately held logistics firm in Wyoming, and 8 percent to Bridger Trading, a fast-growing midstream and marketing company backed by private equity firm Riverstone.

Bridger, which also runs rail loading facilities including one in North Dakota, says that its marketing team handles over 70,000 bpd of crude oil as of June, much of it by rail.

The firm aims to expand its fleet of 900 rail cars - all built in 2013 or 2014, after tougher standards came into effect - to 1,410 by next March, according to its website. It also owns pipeline and storage capacity, plus a growing fleet of crude-hauling trucks. Last month it announced a deal to buy Occidental Petroleum (OXY)'s Permian basin trucking fleet.

Kodiak does not identify its customers by name, but says it has worked to diversify its customer base. The two largest buyers of its oil and gas output took 23 percent and 14 percent of its production last year, according to its SEC filing. No other company took more than 6 percent, the firm said.

In February, Kodiak's vice president of marketing Bruce Taton told analysts that the firm was selling 65 percent of its crude direct to refiners, and about 80 percent of it was moved by rail. In January and February, about 40 percent of the crude went to the East Coast and 15 percent to the West Coast.

"With the transparency in the market, we feel we're capturing fair value for our oil without having to expend capital on pipeline space, rail cars, or proprietary trucking," he said. "That being said, we're always looking at new proposals for pipelines and other means to move oil to markets."
 

By Ernest Scheyder and Catherine Ngai