The Dakota Access pipeline began life mired in controversy, but has nonetheless proven to be a game changer for the Bakken, oil industry leaders and state regulators say.
Energy Transfer Partners CEO Kelcy Warren in a recent radio interview said the pipeline is already running near its capacity of 570,000 barrels of crude oil per day. He also said it has been providing the Bakken with a competitive edge over the Permian — for now anyway — as that play faces constrained pipeline capacity similar to what the Bakken experienced before Dakota Access.
“It’s wonderful to see the rig counts pick up and to see the barrels produced increase,” Warren said, referring Dakota Access’ operation. “Everything we believed would happen has in fact happened.”
Tessa Sandstrom, spokesperson for the North Dakota Petroleum Council, agreed that the pipeline has helped the oil industry tremendously, with substantially improved logistics.
“The more pipelines you have, the better price you can fetch per barrel,” she said. “That’s good for mineral owners and the state, and it helps reduce truck and rail traffic. If we don’t have the pipeline capacity in place, we’ll have to rely on truck and rail again.”
Dakota Access began operating on June 1, 2017. Before that, the Bakken’s weighted average price or discount was $7.41, according to the state’s Pipeline Authority Justin Kringstad. After it began operations, the average shifted to $4.66.
“That’s just over $3.05 price improvement per barrel post DAPL on average,” Kringstad said. “And that is just June through April of 2018 or so.”
Kringstad’s calculations show an additional $111 million in state tax revenues that would not have been collected under the old discount.
“That doesn’t include the royalty price impact, or the industry price impact,” Kringstad said. “The state only gets roughly 10 percent of the revenue. The remaining 90 percent is for industry and royalty owners, so a tremendous amount of revenue is going back or staying with the royalty owners and producers.”
The pipeline transports the equivalent of 500 to 740 rail cars worth of oil every day, or 250-plus oil tanker trucks. That has helped to reduce oil train and truck traffic — although lately, market conditions are favoring voluntary oil train transport.
“The indicator that I typically watch, the Brent Oil price minus the WTI price, that spread was just over $10,” Kringstad said. “When that price is higher than $5 per barrel, historically the industry tends to pull barrels off the pipeline systems and put them on the rail network to take advantage of that market situation.”
Rail transport hit a low last summer of around 120,000 barrels per day, Kringstad said, but was back up to 260,000 barrels per day in March as market conditions shifted to favor east and west coast crude by rail markets.
Some of that shift is a result of oversupply in Cushing, Oklahoma, Kringstad said. Permian oil is congesting that market hub, lowering prices. Oil that can go to east and west coast refineries is thus finding better prices there.
In addition to lower transportation costs, the industry found new and better ways to complete its wells during the downturn, lowering Bakken breakevens. Now, with market prices improving, the oil and gas sector is set to take off. Though the takeoff is still being substantially constrained by lack of labor, with more than 13,000 job openings statewide — a new Jamestown, if they were all filled.
Bakken oil production surged ahead in April, according to state production figures, nearly exceeding the state’s all time high of 1.23 million barrels per day in spite of the labor crunch.
Dakota Access has helped meet pent-up demand for crude oil takeaway, but if production continues to grow as expected, Kringstad said it will begin to exceed capacity again by early 2019.
It is not yet known whether that will mean another large transmission pipeline is in the offing.
“Right now that’s the billion dollar question that the industry and myself are trying to assess,“ Kringstad said. “What are the long-term transportation needs? What options are available?”
Warren seemed doubtful about that in his recent radio interview, suggesting that there are other things that could be done first, such as bumping up capacity to Patoka.
Long-term forecasts for North Dakota oil production by the mid-2030s is for between 2 and 2.4 million barrels of oil per day, about double of what it is now, Kringstad said.
“When we look at the takeaway capacity options, it’s right around 1.4 million bpd with what is now in service or slated to come online in the next several years, so there is potentially a 600,000 to one million barrel per day potential shortfall long term,” he said.
With it taking years to build Dakota Access, and the controversy that it attracted, companies have to assess their long-term appetites for a new project. Internal forecasts and the likely direction of markets, as well as what kind of rates would be needed for a new project to succeed will all play a factor in whether another large-scale pipeline gets built.
“I know the companies are looking at all the options available,” Kringstad said. “Our expectation is for robust production growth long-term.”