"Despite the robust outlook for crude-oil supply growth in the Williston Basin in the Bakken Shale, we did not receive sufficient long-term commitments under the terms we needed to construct the Bakken Crude Express Pipeline..."
— Oneok President Terry Spencer
As a Wealth Daily reader, you know the Bakken Shale oil story better than most investors. After all, we've been talking about the Bakken in this letter since 2008.
Oil production from this prolific formation was barely a blip on the radar back then — around 200,000 barrels a day...
By the end of last year, production hit 700,000 barrels a day. Now some expect this field to produce 1.2 million barrels a day by the end of next year.
To put that in perspective, only three oil fields in the world can pump more than a million barrels a day right now: Saudi Arabia's Ghawar field, Kuwait's Burgan field, and the Rumaila oil field in Iraq. That's it.
Mexico's Cantarell used to pump over two million barrels a day. That was ten years ago. Today they're squeezing less than 400,000 barrels a day from the Cantarell.
Russia's Samotlor field used to do 3.5 million barrels a day... in the 1970s. Now it's under 350,000 barrels a day.
Yes, America's Bakken oil field is on the verge of becoming the world's next super major oil field.
So, why are pipeline companies canceling plans to build pipelines to service the booming Bakken?
How to save $1.8 billion (and miss a huge opportunity)
Oneok (NYSE: OKE) is essentially a vertically-integrated natural gas utility that serves the Midwest. The company gathers natural gas and natural gas liquids (NGLs) from many of America's prime oil & gas fields — like the Anadarko Basin, Permian Basin, Arkoma Basin, Niobrara, and yes, the Bakken (which has NGLs in addition to oil).
It transports the gas and NGLs on its own pipelines, stores it, and sells it to end users and electric utility companies.
Oneok is in a pretty good position to see the boom in oil production in the Bakken. It got a firsthand view that the Bakken is underserved by pipelines.
Right now, just 38% of Bakken oil (roughly 285,000 barrels) gets to market via pipeline. And the majority of it travels on Enbridge’s (NYSE: ENB) North Dakota pipeline, which transports 210,000 barrels a day to refineries around Clearbrook, Minnesota.
It's little wonder Oneok wanted to spend $1.8 billion to build a pipeline to bring Bakken oil to Oklahoma...
After Enbridge's Keystone XL Pipeline plans were rejected by the Obama administration, Oneok was probably licking its corporate chops over the amount of money it could make.
There was just one problem.
As you might guess from the quote above, Oneok couldn't convince enough Bakken oil producers to sign up to ship their oil via pipeline. Someone had beaten them to the punch.
The Early Bird Gets the Worm
Most Bakken oil producers already signed long-term contracts to ship their oil by railroad. Even though it's more expensive to ship oil by rail, railroad lines were already in place as Bakken oil production ramped up. Not only that, but the railroads quickly committed to expand their capacity to handle as much Bakken oil as the drillers could drill.
The biggest railroad servicing the Bakken is Burlington Northern Santa Fe (BNSF). The company just spent over $1 billion on upgrades, and can now handle one million barrels of Bakken oil a day.
It may interest you to know that the Burlington Northern Santa Fe (BNSF) is owned by none other than Warren Buffett.
This fact is important for a couple reasons.
First off, it tells us that Warren Buffett is still as savvy as they come. Even at age 82, he was able to see the potential of the Bakken far earlier than many other investors. After all, he bought BNSF railroad in 2010, long before the Bakken was promising to dramatically lower America's dependence on foreign oil. And Buffett's already made back most of the $34 billion he spent on his investment.
More importantly, Buffett's move tells us there is a lot more money to be made from shipping U.S. oil by railroad.
One industry insider recently told Bloomberg, “This trend is not temporary... Rail transportation is becoming more competitive and will continue to take barrels away from the Enbridge North Dakota system.”
We estimate you can easily earn 25% a year on this trend of shipping oil by railroad... and this trend will last at least ten years.
That would put your total take at 519%.
Until next time,
An 17-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.