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Americas Energy CEO Series: John Gatling, Hess Midstream

The startup this summer of the 520,000 b/d Dakota Access Pipeline is already bringing about a much sought-after change for landlocked Bakken shale oil producers, such as Hess, which have long dealt with steep price discounts and increasingly relied on the pricier railroads to ship their light crude to markets in the absence of a major pipeline.

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In a reflection of that change -- primarily due to DAPL and the Energy Transfer Crude Oil Pipeline (ETCOP) -- producers are now able to reach the US Gulf Coast easier and also fetch a premium by exporting their crude for the first time to distant markets.

"The start up of DAPL has already provided an additional 50,000 b/d of export capacity for our strategic partner Hess [Corp. and parent company] to optimize offtake between pipeline, rail and local refineries," John Gatling, COO of Hess Midstream, said in an interview with S&P Global Platts.

The 1,172-mile DAPL line originates in North Dakota, shipping Bakken crude to Patoka, Illinois, where it connects to the 700-mile ETCOP pipeline, bringing crude down to Nederland, Texas. At Nederland, Energy Transfer Partners offers 26 million barrels of crude storage to facilitate exports.

In mid-October, Bakken producer Continental Resources announced its first-ever overseas sale, with just over 1 million barrels due to be shipped to China starting in November.

With the US Energy Information Administration forecasting in its November Short-Term Energy Outlook a $6/b differential between WTI priced at Cushing, Oklahoma, and Brent to remain through the first quarter of 2018, the expectation will be for more Bakken producers to export crude to Asia.

Gatling's statements came after Hess announced in late October the startup of its Johnson's Corner Header System, which delivers crude from McKenzie County in North Dakota to DAPL.

"It is operating well and the project was delivered [three months] ahead of schedule," Gatling said.

The pipeline is still in the early days of startup, but eventually its capacity will be 100,000 b/d, he said.

The new header system gives producers the flexibility to ship crude north and south of the Missouri River, Gatling said.

"In the north, we are connected to Clearbrook via Enbridge's connection point for its Bakken Pipeline system and in the south it can be DAPL. But the push is through DAPL, as it provides access to Patoka and Nederland," he said, noting current volumes are biased toward export markets and Brent pricing.

Startup of Johnson's Corner Header is important as it "connects the last mile" and provides another option for Bakken producers, said Sandy Fielden, an analyst with Morningstar.

Besides providing flexibility and more market access, Bakken producers can potentially load crude onto Aframax vessels at Nederland, Fielden said.

The DAPL trunkline is currently transporting some 350,000 b/d of crude, according to latest estimates by the North Dakota Pipeline Authority, and besides the Johnson's Header, it also receives crude from two other sources: 10,000 b/d from Savage Services Corp. and 40,000 b/d from American Midstream.

Savage Energy has the capacity to feed 60,000 b/d into DAPL. But the remaining 50,000 b/d on non-committed option will depend on shipper demand as they seek the most economic markets, said its spokesman, Jeff Hymas.

SEEKING MORE VOLUMES

Crude output in North Dakota has been ranging from nearly 1.03 million b/d to 1.08 million b/d since February. But that figure will likely go up by 30,000 b/d to 50,000 b/d each year as new frack crews are added, according to Lynn Helms, director of the state's Department of Mineral Resources.

To deal with an anticipated growth in production, Hess Midstream is already keeping options open to add new capacity for its Johnson's Corner system, Gatling said.

"The pipeline is looking good and we will add additional booster pumps. That will happen in mid-2018 when there could be an opportunity to push more crude. Increasing pipeline capacity has to do with pressure and that can give us a bit of an upside," Gatling said, without indicating what the expanded capacity will be.

Hess Midstream's crude pipeline system is underpinned up to 85% by offtake contracts with its parent Hess Corp. and from other producers like ConocoPhillips. But it is still "aggressively" going after more third-party volumes, he said.

"There is no number per se. But as soon as we see capacity exceeding 100,000 b/d, we will add additional pumps," Gatling said.

New production will be coming from Hess, which will add two more rigs in the Bakken in 2018 from the current four rigs, it said in its earnings call last month.

Hess' production in the Bakken in the third quarter was 103,000 boe/d, and is expected to rise to 175,000 boe/d by 2021, Hess said at the time.

CRUDE SHIPMENTS IN RAIL CARS TO WEST COAST

Based on the current balance between production and pipeline capacity, there is no shortage now in takeaway capacity for Bakken producers, Gatling said.

Yet, there is demand for rail that provides access to refineries in the US West Coast, with Hess continuing to move some 10,000 b/d, he said.

"There is a demand for refineries in the Pacific Northwest for crude that is light and sweet," Gatling.

A 17,000 b/d uptick in crude-by-rail shipments from North Dakota was also seen in September from North Dakota, the director of the state's pipeline authority, Justin Kringstad, said in an email.

"Our estimates show 117,000 b/d to 147,000 b/d of crude being shipped [in rail cars] in September, compared with 100,000 b/d to 130,000 b/d in August," Kringstad said.

While some volumes were shipped to the US West Coast, crude was also hauled to the US East Coast after Hurricane Maria disrupted waterborne deliveries, he said, without giving volumes.

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