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By Alan Kovski
The Dakota Access Pipeline, filling with crude oil in preparation for going into service May 14, should rearrange some crude oil flows and give a boost to the profit margins of oil producers in North Dakota, analysts told Bloomberg BNA.
After delays, politics, protests and litigation, the $3.78 billion 1,172-mile pipeline built by Energy Transfer Partners L.P. will move crude from the Bakken Shale region to a pipeline hub in Patoka, Ill.
The system has another long leg that avoided the politics and protests. It is the $1 billion Energy Transfer Crude Oil Pipeline (ETCO), also set to go into service May 14. It is a converted former natural gas pipeline stretching 788 miles from Patoka to Nederland, Texas, on the U.S. Gulf Coast.
“Line fill is nearly finished,” Greg Garland, CEO of Phillips 66 Co., said April 28 during his company’s first-quarter earnings call. His company owns 25 percent of both Dakota Access and ETCO.
A common expectation among production companies and investment bank analysts appears to be a boost to gross margins in a range of $1 to $3 a barrel as transportation costs drop and North Dakota prices rise because of greater market access in much of the Midwest and South. But not necessarily an immediate boost.
“It’s going to take a while, I believe, for the market to adjust to what’s the new normal,” said Justin Kringstad, director of the North Dakota Pipeline Authority, a non-regulatory petroleum data analytics agency.
Kringstad told Bloomberg BNA his agency is expecting a general boost to crude oil prices in North Dakota, not just an increase for companies booking capacity on the pipelines. The price gain could be $1 to $2 a barrel, though varying by location and company, he said April 25.
He suggested it would take six to 12 months for the market to reach a new equilibrium and clarify the price impact of the new pipeline.
Bakken oil producers have been suggesting a boost of around $2 a barrel for North Dakota crude, said Subash Chandra, an analyst at Guggenheim Partners LLC, an investment and advisory company.
Some of the operators want to manage their own crude sales, while others appear to be leaning on third-party marketers, who may have a better sense of the pipeline’s likely market impacts, Chandra said.
If an increase of $2 a barrel is a reasonable estimate, it would mean a shipper moving 50,000 barrels a day would get an additional $36.5 million a year.
Dakota Access will start out carrying about 470,000 barrels a day and is designed to be able to carry as much as 570,000 barrels a day, or about half of North Dakota’s oil output.
Nine companies committed to long-term contracts for shipping oil on Dakota Access. Energy Transfer Partners does not appear to have released their names, though some have named themselves.
“We start putting barrels on it June 1st, ourselves,” James Volker, CEO of Whiting Petroleum Corp., said during his company’s April 27 earnings call.
Whiting especially may benefit, given that 93 percent of its production is from the Bakken Shale and, below that shale, the Three Forks formation. The two oil-rich strata are the heart of what petroleum geologists call the Williston Basin, which is primarily in North Dakota but includes a little of Montana, South Dakota, Saskatchewan and Manitoba.
Other companies that may benefit from the Bakken oil market boost, regardless of whether they have booked space on the new line, include Oasis Petroleum Inc., Continental Resources Inc. and, to a lesser extent, Hess Corp., according to an April 13 research note by investment bank Morgan Stanley.
The ownership of the Dakota Access and ETCO combined system includes Energy Transfer Partners (38.25 percent), Phillips 66 (25 percent), Enbridge Inc. (27.6 percent) and Marathon Petroleum Corp. (9.15 percent).
Energy Transfer Partners completed a merger April 28 with Sunoco Logistics Partners L.P., and the combined company is called Energy Transfer Partners.
The two refiners with ownership stakes noted options within their own systems for benefiting from the impending market changes as Bakken crude flows to refineries in the Midwest and around the Texas Gulf Coast.
“We think Bakken will be an attractive supply crude within our system, particularly in Louisiana and Wood River,” Garland said, referring to Phillips 66’s two refineries in Louisiana and one in Wood River, Ill. A connection in the Nederland, Texas, area will allow the crude to flow east on a line into Louisiana.
Marathon Petroleum will be have the option of taking Bakken crude to the company’s Midwest refineries, CEO Gary Heminger said during his company’s first-quarter earnings call April 27.
Railroads can be expected to lose business to the pipeline. Some of the crude has been going east by rail on the BNSF railway as far as Chicago and then by CSX railway from Chicago to Albany, N.Y., after which the oil can be taken south to New Jersey by rail or barge for delivery to refineries along the Delaware River.
Dakota Access should allow for a $3 to $8 decrease in transportation costs per barrel, said Tessa Sandstrom, spokeswoman for the North Dakota Petroleum Council. Rail transportation is not expected to dry up, however.
“Rail is still helpful because it goes to premium eastern markets where pipe doesn’t,” Chandra said. “So it’s not just transport cost but also oil sale price that matters,” he said, implying there is a price premium for oil reaching Delaware River refineries.
Those refineries typically have relied on light sweet crudes, a category including Bakken crude. They often have processed crude from the North Sea and West Africa.
Pipelines are safer and less polluting than railroads, but environmental advocates are unhappy about Dakota Access. They have supported the Standing Rock Sioux in the tribe’s lawsuit to stop the pipeline from crossing under the Missouri River at Lake Oahe near their reservation.
The lawsuit is continuing in the U.S. District Court for the District of Columbia, but the rejection of a preliminary injunction did not bode well for the litigants ( Standing Rock Sioux Tribe v. U.S. Army Corps of Eng’rs, D.D.C., No. 1:16-cv-1534, 7/27/16 ).
The tribe still has a chance to win through its arguments over violations of the National Environmental Policy Act, said Sharon Buccino, director of the land and wildlife program for the Natural Resources Defense Council, speaking to Bloomberg BNA April 20.
Buccino criticized the policies of President Donald Trump and Interior Secretary Ryan Zinke for heading the nation toward more oil and gas drilling and more pipeline construction without adequate consideration of the environmental consequences.
“In the past there was an assumption that building more pipelines was in the national interest,” she said.
“We have to take the time to make sure we’re making smart investments about our future,” Buccino said.
To contact the reporter on this story: Alan Kovski in Washington at email@example.com
To contact the editor responsible for this story: Paul Connolly at PConnolly@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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