Fewer Bakken crude exports, shifting pipeline flows, lower production and dramatic pricing fluctuations are all possible repercussions of a federal court ruling handed down that the main artery out the Williston Basin, the Dakota Access Pipeline, will be shut and emptied by August 5.
Uncertainty has clouded Bakken crude oil trading in recent days as traders and marketers currently buying and selling August barrels have been forced to seek alternative transportation methods and operate on the assumption that DAPL could be shut, barring any developments in a fast-moving appeals process. Although it is still possible for the decision to be reversed, many market participants are already bracing for a future without DAPL.
“It's terrible even for those parties who are not committed [shippers on DAPL],” one crude source said about current trading conditions. “It affects the whole basin and the downstream. It's a mess.”
On July 6, a federal judge handed down a surprise ruling that ordered DAPL to shut by August 5 pending an extensive federal environmental review. Three days later the judge denied an emergency stay request, but expressed a willingness to extend a deadline to allow pipeline operator Energy Transfer more time to empty the crude pipeline.
DAPL, which has been operating for three years, has the capacity to move 570,000 b/d out of the Williston Basin, on to Patoka, Illinois, and down to the US Gulf Coast to Nederland, Texas, via the Energy Transfer Crude Oil Pipeline (ETCOP). Without DAPL, barrels will have to be diverted to other, smaller pipeline outlets including the Enbridge system, which moves crude to Clearbrook, Minnesota, and other lines, such as the Hiland line, which moves crude south and west through the Rockies and on to the Cushing, Oklahoma hub. S&P Global Platts Analytics estimates that the other pipelines that provide takeaway capacity out of the Williston Basin can provide up to 625,000 b/d, when running at full rates.
Bakken crude production declined in the second quarter as the market responded to low crude oil prices. And some of those curtailments may be extended longer than expected as uncertainty around DAPL continues. With North Dakota oil production hovering around 1 million b/d, alternative outlets will be required and all other pipelines out of the Bakken will likely max out, according to Platts Analytics.
Bakken crude traders have said that crude by rail will be needed in order handle the incremental barrels. However, ramping up rail is costly and time consuming. Also, the higher cost to move crude by rail could pressure Williston Basin prices lower to between $8/b and $9/b discounts to the WTI calendar-month average, a crude trader said.
Bakken pricing fluctuatesDAPL’s uncertain fate has thrown August trading of Bakken crude into unprecedented territory. Some trades for Bakken crude injected into DAPL have taken place. However, most is still just standing at bids and offers into the pipeline as the market awaits clarity. On July 13, a bid for August DAPL was heard at a $6.25/b discount to the WTI calendar-month average. It was offered at minus $4.25/b.
Meanwhile, liquidity in the Williston Basin has shifted to other pipeline injection points, such as Beaver Lodge, which was heard trading on July 14 at WTI CMA minus $4.30/b, about $1.30/b stronger than where Williston basin crude was last assessed.
Elsewhere, Bakken crude at Clearbrook, Minnesota, and competing Canadian light sweet grades have been strengthening as buyers in the Midwest anticipate a lack of supply in Patoka, Illinois, if and when DAPL shuts. Bakken Clearbrook was trading July 13 at WTI CMA minus $1/b – its strongest level since June 1, when it was at minus 95 cents/b.
Bakken exports fallExports of light sweet Bakken crude from the US have fallen in recent months, a trend that could continue with the suspension of crude shipments on DAPL. In the second quarter of 2020, around 108,147 b/d of Bakken crude was exported from the US, less than half of the 219,669 b/d exported of the grade in the first quarter, according to data from Kpler, a data intelligence firm.
Exports of the grade hit their zenith in the second half of 2019, with 268,706 b/d of the grade exported in the fourth quarter of 2019, while the highest single month was recorded in July 2019 at 316,659 b/d, according to Kpler data.
The majority of Bakken cargoes are exported through Phillips 66’s Beaumont terminal, while Energy Transfer’s Nederland terminal also handles some Bakken crude exports, according to Kpler data. As DAPL delivers Bakken crude to Beaumont/Nederland area on the USGC, a shutdown of the pipeline would result in fewer barrels of the grade reaching the Beaumont/Nederland area, potentially impacting the volumes of Bakken crude available for export out of the region.
Sources said that it is possible for some Bakken crude to be sold out of tank storage along the US Gulf Coast to fill some cargoes or otherwise be transported to refineries in the region. Energy Transfer’s Nederland Terminal has a total storage capacity of about 29 million barrels in 150 above-ground tanks, although not all is used for Bakken crude. The neighboring Phillips 66 Beaumont terminal, which has access to numerous pipelines including DAPL/ETCOP, has crude storage tanks with a capacity of around 7.4 million barrels.
However, one USGC crude broker recently said no Bakken cargoes are being offered for August loading.
Other Bakken export outlets do exist, yet are more rare. While not exporting Bakken crude as regularly as the Beaumont and Nederland terminals, in April, one cargo of Bakken crude was exported to the Mundra Refinery in India via the Seaway terminal, according to Kpler data. That terminal is connected to the crude oil storage hub of Cushing, Oklahoma, via the 500-mile Seaway pipeline.
While Bakken crude can reach the US Gulf Coast on Seaway, and other lines that originate in Cushing, space on those is tight. And light sweet crudes must compete for space with other light sweet crudes and heavy sour Canadian grades, one trader said.
“[Bakken] likely will have to battle Canadian heavies for line space,” the trader said. “The US Gulf Coast needs the heavy crude, so it is likely the Canadian heavies will win out.”