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As Dakota Access comes online, America’s most pipeline-constrained shale play sees new life

Ian Dundas expects to see far fewer oil trains rumbling across the sprawling farmlands of North Dakota in coming years.

Dundas is the chief executive of Calgary-based Enerplus Corp., one of the first companies to enter the Bakken, an oilfield spanning southern Saskatchewan, North Dakota and Montana. In the absence of available pipeline capacity, companies operating in the region had for years moved oil on an existing rail network in Canada and the United States. As production boomed, producers began investing more in oil-by-rail terminals, paying a premium to get their product to market.

But the completion of the highly contentious Dakota Access pipeline in June, a major oil conduit carrying some 570,000 barrels per day of crude from North Dakota to Illinois, has upended the region’s dependence on rail.

The pipeline has dramatically reduced shipping costs for Bakken companies, bringing overall costs in line with other U.S. shale producers, like those in the highly prolific Permian Basin in Texas and New Mexico.  

“It’s going to be a pretty powerful advantage that we haven’t had for the past six or seven years,” Dundas said in an interview Thursday.

Production in the Bakken began to rocket upward around 2009, growing from roughly 200,000 barrels per day to more than one million bpd in less than five years.The rapid growth did not come alongside an equally fast expansion of pipelines, however, and the pipeline system in the region quickly became congested. By 2014, Bakken producers were shipping around 500,000 barrels per day of crude by rail car, nearly half of the 1.2 million bpd total production.  

Before Dakota Access, about 25 per cent of the oil shipped out of the state travelled by rail. Now that figure is closer to seven per cent, according to recent data. 

The higher availability of pipeline capacity has translated into much lower shipping costs for producers, giving companies more value for every barrel of oil. 

In early 2014, for example, Enerplus was receiving a US$13 per-barrel discount for its oil compared to West Texas Intermediate, a benchmark price for U.S. crude traded in Cushing, Okla. Most of this was tied to higher shipping costs (moving crude by rail costs around US$10-14 per barrel, compared with about US$5-6 on Dakota Access). 

By last year, that total discount had shrunk to US$7, and is expected to fall as low as US$3.50 in the second half of 2017, Dundas said.

“These are pretty dramatic moves when you talk about the lower margins that everyone is struggling with in a $50 oil world,” Dundas said.

The Dakota Access pipeline, owned by a consortium of companies led by Dallas-based Energy Transfer Partners, was loudly opposed by environmental groups and First Nations groups living along the proposed route. 

The Sioux First Nation in Standing Rock, a reservation that straddles the North and South Dakota borders, protested the pipeline in a standoff that lasted for months. People were eventually forcibly removed from a site they had used as a staging ground for the protest.

Although the pipeline has been in service for months, the same opposition groups are now trying to get the pipeline shut down due to allegations the consortium had removed too many trees and improperly handled some soil during construction.

In June, a federal judge seemed to question the validity of Dakota Access’s approval based on the alleged infractions, saying the consortium’s study didn’t fully address environmental risks caused by potential spills. U.S. Army Corps of Engineers, who carried out the initial environmental review, has been asked to compile a new report.

Observers don’t expect the project will be shut down due to the decision. 

“I think that would be very, very unlikely,” said Patrick O’Rourke, an analyst with AltaCorp Capital in Calgary. “I can’t think of a situation has come online, started flowing, and then had to cease operations.”

On Thursday, the North Dakota Public Service Commission delayed hearings on whether the company violated state rules.

Bakken producers are nonetheless relieved to improve their margins amid persistently low oil prices. Analysts say Bakken producers tend to have slightly higher break-even prices than Permian producers, though Dakota Access will make many producers competitive in the low US$40-range.

“A lot of us are thinking you have to live in this kind of range-bound world, and that means you have to keep your costs low,” Dundas said.

“Oil-by-rail as a concept is unique. It’s really quite inefficient, but it has definitely served a role during more robust oil prices, where you able to layer on that extra cost. And that is what propelled all of this extra growth in North Dakota.”

Financial Post

jsnyder@nationalpost.com

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