Is This The End Of The American Pipeline Boom?

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By David Messler

The Dakota Access Pipeline, (DAPL) was built to transport Bakken crude oil from its point of origin in far North Dakota to a terminus in Patoka, Illinois. Patoka is the second largest crude storage hub, after Cushing, Oklahoma. It also is strategically located in the mid-West refining matrix with a number of crude oil refineries in the Illinois/Indiana area.  With a nameplate capacity of ~570-K BOPD a clear need existed for it in the minds of operator, Energy Transfer, (ET), and its partners, Phillips 66, (PSX), Enbridge, (ENB), and Marathon Petroleum, (MPC), as production from this remote corner of the country ramped to nearly 1.5 mm BOPD from 2016 to early 2020.

EIA

In recent months, thanks to the Covid-19 and OPEC+ induced oil price crash, production from the Bakken has dropped precipitously by nearly a third to just over 1-mm BOPD. All indications are that this decline will continue as Bakken crude carries higher lifting costs than other shale plays, perhaps most notably the Permian.

WSJ

And that brings us to the question is the DAPL really needed if crude production is going to decline in the Bakken?

A long slog to an adverse court finding

In a previous OilPrice article I had highlighted the regulatory and legal risk pipelines carry. Essentially much of the pushback is a nimby reaction to having a major petroleum thoroughfare across the street from your house, or next to your drinking water, as is the situation with the DAPL and the Standing Rock tribe. That risk came home via a court decision we’ll discuss in a minute.

Bloomberg Law

It’s been a tough slog for ET as it battled for years to build this line. Faced with implacable opposition from the Standing Rock Sioux Tribe, whose concern about potential contamination of its water supply and sacred burial grounds, led to many clashes with the pipeline builder, in and out of court. The most famous of these was widely reported in 2016, when thousands of protesters camped out near the river crossing of the Missouri River, a major source of water to the indigenous tribes in this arid locality.

The future of the DAPL was very much in doubt after a number of adverse court rulings, until the advent of the Trump administration where the Army Corp of Engineers, the permit grantor, was ordered to issue a permit for the line. As it was already nearly built the line went into service in 2017.

The tribe sued in Federal court and after a lengthy battle the tide began to turn back in their direction when in March, of 2020 Judge Boasberg, an Obama appointee to the D.C. District Court, ordered a full Environmental Impact Statement be done. This is a lengthy process that had been truncated by Trump’s executive order. As an aside, it can be noted that the Trump administration’s track record with Federal judges, appointed by the prior administration is spotty at best.

The 7th of July, brought a bit of a stunner with Judge Boasberg’s Decision that the DAPL must be shut down and emptied with-in 30 days. Essentially the judge found that the Tribe’s fear of water contamination outweighed the company’s interest in profits and logistics. Particularly as he asserted in his decision-

“Yet, given the seriousness of the Corps’ NEPA error, the impossibility of a simple fix, the fact that Dakota Access did assume the economic risk knowingly, and potential harm each day the pipeline operates, the Court is forced to conclude the flow of oil must stop.”

Bloomberg Law

I like to do a little ciphering in my articles. Just how much oil would draining line entail? First, we’ll make an assumption and call this winding, undulating pipe, a cylinder. Then we’ll assume that it’s full. With that determination, the volume calculation becomes fairly simple.

Pipe capacity per foot:  V = i.d2 X 1029.41

35.12 X 1029.41 = 1.196 bbl/ft

1172 X 5280 X 1.196 =7.410 mm bbls

With its 36” diameter and 1172 mile length, about 7.4 mm barrels of oil will have to be rehoused to drain it. Now the pipeline is probably not full to capacity. Pipes rarely are for pumping reasons. Regardless, there’s a lot of oil in that tube, and draining it will be no small task! Anyone who thinks this will be done in 30 days is seriously mistaken. There are not enough rail cars in this part of the country to take-off a fraction of that amount.

The company has naturally appealed and asked the court to stay this decision claiming that it will cost them nearly $2 bn over the next 2 years while they appeal. It’s anybody’s guess as to their chances of prevailing.

That pretty well frames the argument for you, and we will leave that aspect of the controversy there for now.

Does the DAPL really matter?

That’s really the crux of the matter to me. When we look back at the explosion of pipeline building that’s occurred over the last decade, we find it was predicated on two primary pillars.

The first was that gas, so plentiful here in the U.S. thanks to the fracking revolution, would find ready international markets globally. At first that predicate appeared to have substantial staying power, as companies like Cheniere Energy, (LNG) began to acquire long term (twenty years plus in many cases) contracts from international buyers. The primary destination markets being Europe and Asia. Then the LNG plant building FID’s began to accumulate around the world, along with massive new supplies of Russian gas to be piped toward Eastern Europe through the much discussed Novatek gas pipeline. The market was already becoming over-supplied before the Covid pandemic hit. Beginning last year cargoes began to be cancelled coming out the U.S. A trend which has accelerated as through late-June, about 75 LNG cargos had been cancelled.

The second was higher oil and gas prices than we’ve seen for the past five years. Between 2010 and 2019 approximately 10-15 new crude oil and gas pipelines were built and brought into service each year for a total of 239 new or expanded pipeline projects. The capex behind this development is staggering, with just one pipeline company, Energy Transfer, (ET) have long term debt of ~$40 bn against a capitalization of $17 bn, a ratio heading into a problematic area.

More pertinent to our topic, as to the relevance of the DAPL, a number of other pipelines are in place. Notably-The Vantage, Alberta Clipper, Cherry Creek, Enbridge, but none have anywhere near the capacity of the DAPL or directly serve the eastern states market out of the Patoka hub. One pipeline and gathering company, Crestwood Energy has stepped into the fray to assure sellers of continued access to markets in the event DAPL really shuts down. Having had a look at their asset base, I don’t believe they could anywhere near offset the DAPL.

So closure of the line will have a “stranding” effect on Bakken crude, if it indeed occurs. The only viable route would be through railing, and that could be problematic for Bakken crude as crude train derailments were among the leading rationalizations for pipelines.

But the larger question of does the DAPL matter because Bakken crude liftings are going to fall back to levels not seen since the early days of shale fracking, is yet to be settled. A combination of shale driller bankruptcies, lack of export capacity should the DAPL actually be shut down, and persistently lower global oil prices than the Bakken can support, may ring the final curtain for the DAPL.

Your takeaway

The tide appears to be shifting in the probability of new pipelines being built. Is this the end of an era? A Reuters article posed this as a question recently. Efforts by the Trump administration to streamline approvals for projects like DAPL have largely foundered in the courts.

The latest being last week’s decision by the U.S. Supreme Court to block construction of the Keystone XL pipeline, pending further environmental review.

It should be noted that costs of these “environmental reviews” are largely borne by the requester, in this case the company wanting to build the line. A fairly large army of lawyers, environmental engineering firms should be sharpening their knives, as an environmental review is a full employment act for them.

In summary, in spite of the high distributions that the big pipeline companies pay, often above 10%, investors should keep the larger trend against new pipeline development in mind when thinking about investing in this space. With the stroke of his pen, Judge Boasberg opened investors in Energy Transfer to the possibility of having to bear billions of dollars in new expenses for the continued operation of the DAPL. A decision that could ultimately lead to the company walking away from it, and still owing billions for its construction.

Crude Oil

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