Crestwood preps for more rail, truck crude oil transport if DAPL closes

Houston — Crestwood Equity Partners plans to keep oil and natural gas volumes flowing in the Bakken Shale by ramping up crude-by-rail and trucking transportation, as well as tapping into a patchwork of third-party pipelines if the Dakota Access Pipeline is shut by court order.

With the largest crude-by-rail hub in the Bakken, as well as a mix of pipeline and trucking transportation in the basin, Crestwood executives said they are gearing up for the possibility of the basin's largest crude pipeline system potentially closing. DAPL currently remains open while an emergency stay request is pending in federal appeals court.

Crestwood is working to make additional connections for its Arrow oil and gas gathering system and preparing to make adjustments as needed to its COLT crude-by-rail hub to accommodate customers, Crestwood CEO Bob Phillips said during the Aug. 4 earnings call.

"We're going to use the COLT Hub, we're going to use third-party pipelines, and we're going to use trucking," Phillips said. "Crestwood is uniquely positioned in the Bakken to be able to offer that kind of takeaway capacity."

The COLT Hub offers 1.2 million barrels of crude storage capacity and 160,000 b/d of crude-by-rail loading capacity.

"We're moving significant barrels through COLT now in anticipation, and for customers that might be anticipating a potential DAPL shutdown," Phillips said. "In the event it does happen, we've got the takeaway capacity to be able to serve our East and West Coast refiners who are looking for optimal market barrels and our producers who are looking for more takeaway options."

For instance, Bakken producer Continental Resources said it is awaiting a final federal court ruling on DAPL before entering into any new crude-by-rail contracts.

If the 570,000 b/d DAPL is closed, even temporarily, Phillips said Bakken crude could lose about $4/b in additional pricing differentials to incentive crude-by-rail shipments.

"That's simply the incremental rail cost to market," Phillips said. "But we're confident in the ability of our Arrow producers to both flow volumes through COLT and at a current roughly $40/b WTI price, which is the current forward curve, many of our customers are hedged well above that level."

In the second quarter, Crestwood's total revenues plunged 48% as volumes fell, including a 33% dip in COLT rail-loading volumes. But Phillips emphasized that things are quickly turning around in the Q3.

He said he expects volumes to end the year 20% above Q2 average volumes. Those increases already are happening in the Q3, he said.

WPX Energy is Crestwood's largest Bakken customer, and WPX already is completing more wells again, they said. Crestwood estimates WPX could bring online close to 40 drilled-but-uncompleted wells by the end of the year.

Beyond the Bakken

Overall, CFO Robert Halpin said only about 10% of the regular Bakken volumes remain shut-in after Q2, while the Permian' Delaware Basin is fully flowing again. Although the Powder River Basin remains about 40% shut-in, he expects the volumes to be fully restored by the end of the year.

Apart from DAPL, the other "elephant in the room" is Crestwood's largest Power River customer, Chesapeake Energy, recently filing for bankruptcy. Chesapeake also works with Crestwood in the natural gas-heavy Marcellus Shale.

"At this point, in the Chesapeake bankruptcy process, neither of those contracts has been submitted for rejection," Phillips said. "We don't have any indication that they will."

And, in case there is an issue, Halpin added, "We are always aligned with working closely with our customers to try to reach mutually beneficial solutions or 'win-win' scenarios that further incentivize development."

As Phillips emphasized on DAPL and the Chesapeake bankruptcy, "We do not expect either event to have a significant negative impact on our ability to meet our [revised] guidance for this year."