Rocky Mountain oil producers have a lot to be happy about: output is up about 30% since 2002 and Wyoming sweet spot prices have increased during that same timeframe from about $35/b in 2003 to $70/b in 2007.
But that didn't stop producers from complaining at an Interstate Oil and Gas Compact Commission conference in Denver this week that they are not getting as much value for their oil as they should.
Certainly, Rockies producers have faced some pretty hard times, especially in early 2006, when the spot price of Wyoming sweet was valued at about 56% of benchmark West Texas Intermediate spot prices.
But even with the discount, Rocky Mountain producers were making more than they had in the late 1990s and early 2000s and the discounted price was largely of the producers' own making. Rocky Mountain producers are, simply put, victims of their own success.
When crude oil prices began climbing in the early 2000s, Rocky Mountain producers jumped on board the exploration, production and development bandwagon, drilling wells in regions that in years prior to strong prices had been unthinkable. With new drilling technology, especially horizontal technology, producers started hitting big -- both discovering new fields and recovering additional oil from existing fields.
But Rockies producers weren't the only ones drilling new wells because of strong prices. Their neighbors to the north found that with prices over $50/b, Canadian tar sands suddenly made sense, and the big investments needed to bring that oil to market began in earnest.
Everyone knows about the Canadian tar sands. The Canadian government, both federal and in Alberta, as well as the producers themselves, let everyone know that a big slug of new oil would be coming to the market. They worked with pipeline companies to develop outlets for their oil, and with US refineries to get them to consider reconfiguring their facilities to handle their special grade of crude. The Canadian were successful -- new pipelines have been, and continue to be, built and refineries have been, and continue to be, reconfigured.
Rockies producers have not had such luck, in part because they didn't communicate to the world about their success.
One of the biggest problems Rockies producers face is lack of pipeline infrastructure to move their crude to market. Because their production is up, they have to compete with fellow local producers for tight space in the region's two main pipelines, and, at the same time, compete for the capacity with shippers of Canadian tar sands, who are seeking the same markets.
The result has been allocations on the lines: the 95,000 b/d Enbridge North Dakota line, which gathers crude from the Williston Basin and delivers to Tesoro Pipeline and terminates at the market hub in Clearbrook, Minnesota, and Kinder Morgan's 145,000 b/d Platte pipeline, which originates in Casper, Wyoming and moves supply to Guernsey and onto Wood River, Illinois.
The allocations have led to a lot of stranded Rocky Mountain oil, and, of course, to lower prices. The situation is unlikely to improve in the near term, and it could get a lot worse if oil shale production finally takes off, which is possible if technology continues to advance and world crude oil prices stay strong.
The US needs more Rocky Mountain crude oil but that oil won't help if it can't get to market. It's up to the Rocky Mountain producers to spread the word that they have found drilling success to ensure that infrastructure is built to ensure the world receives their oil and they receive a nice netback.
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