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Bakken crude to be rerouted in every direction if DAPL shuts

Highlights

April 9 court hearing could determine DAPL's fate

Volumes would move to other pipelines, rail and truck

Deep Bakken price discounts needed to encourage rail

Houston — Bakken Shale crude oil volumes would ship to the west, east and even up north into Canada and back into the US again as producers and pipeline operators target alternative routes if the Dakota Access Pipeline is shuttered, even temporarily, according to industry sources.

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A federal court could decide as soon as April 9 whether the Bakken Shale's main crude artery is forced to close, dispersing the volumes from the four-year-old, 570,000 b/d pipeline to other existing pipelines, lightly used crude-by-rail networks, and trucking routes, and widening Bakken crude price discounts.

If the Energy Transfer-operated pipeline is ordered shut, energy analysts believe drastic measures will not become necessary so long as the closure is temporary only through the back half of the year. The US Army Corps of Engineers' court-ordered Environmental Impact Statement study could put DAPL back into good legal standing by the end of 2021 or early 2022, although an unprecedented permanent closure would have much bigger long-term impacts.

With Bakken crude production and activity already diminished from the ongoing coronavirus pandemic and, to a lesser extent, DAPL uncertainty, a temporary closure would keep projected Bakken production growth from occurring, but it would not trigger substantial reductions in volumes, analysts said.

"The industry had a lot of time to consider alternate routes," said Colton Bean, midstream analyst for Tudor, Pickering, Holt & Co. "Is it going to be a disaster scenario? No. It's more of a cap on growth than a big impact on existing production."

Where to ship?

With the potential loss of DAPL capacity, analyst consensus mostly expects at least 200,000 b/d to move to existing pipeline alternatives, about 200,000 b/d more to crude-by-rail, and up to another 100,000 b/d or so in increased trucking volumes. Some analysts predict crude-by-rail volumes could even grow by at least 300,000 b/d with some modest optimization and expansion work.

Some of the big volume gainers would include the True Companies' Butte and Belle Fourche pipelines system from the Bakken to Guernsey, Wyoming; Kinder Morgan's Double H Pipeline to Guernsey; Enbridge's Bakken pipeline system to Illinois and Cushing, Oklahoma; Enbridge's Platte Pipeline from Casper, Wyoming, and Guernsey to Illinois; and Tallgrass Energy's Pony Express Pipeline from Guernsey to Cushing.

The major rail networks from the Bakken to the US Gulf Coast's refining and export hubs are BNSF and the joint Canadian Pacific Railway and Kansas City Southern networks, which are merging as part of a $25 billion acquisition. Crestwood Equity Partners' prime COLT rail and trucking hub in the Bakken also stands to benefit.

Even pipeline systems from North Dakota to Canada, such as Enbridge Line 26 and Plains All American Bakken North, could be utilized to move crude north and then back into the US through Enbridge's Mainline network and others.

"In a normal world, you probably wouldn't be shipping crude north into Canada to bring it back into the US," Bean said.

The DAPL case is closely watched by industry and environmental observers alike because it could potentially set a standard for attempting to close existing pipelines and other fossil fuel infrastructure.

Stretching nearly 1,200 miles, DAPL transports crude from North Dakota's Bakken to Illinois, where it connects to the Energy Transfer Crude Oil Pipeline, called ETCO, which runs to Nederland, Texas.

A federal appeals court ruling in January essentially confirmed the pipeline is operating illegally without the necessary legal permitting, and that it is up to the Army Corps, now under President Joe Biden, to determine whether it will let DAPL continue to operate while a court-ordered environmental review determines whether the needed easement is deserved.

Dollars and barrels

North Dakota crude production fell from a high of about 1.5 million b/d at the end of 2019 to less than 865,000 b/d in May during the peak of pandemic lockdowns. Output bounced back to 1.2 million b/d late last year before dipping back to 1.15 million b/d in January.

With fewer than 15 drilling rigs active in the Bakken -- which is 35 lower than the same timeframe last year -- S&P Global Platts Analytics actually expects production to dip a bit more this spring even if DAPL remains open. So a closure would have much less of an impact than during normal times.

Platts Analytics projects average annual production in the Bakken to fall by 45,000 b/d in 2021 year-on-year and increase by 120,000 b/d in 2022, ending 2022 at 1.3 million b/d -- if DAPL is operating.

In the event of a temporary shutdown, Platts Analytics sees crude-by-rail volumes rising from 180,000 b/d to about 350,000 b/d, which is relatively close to pre-pandemic volumes. East Caley Capital projects more reliance on Bakken crude-by-rail though, rising as high as 490,000 b/d in the third quarter of 2021.

In order to financially incentivize such large rail growth, Bakken crude prices within the basin would need to at first fall to a nearly $7/b discount to WTI at Cushing, said Kendrick Rhea, of East Daley.

The Bakken spot price at Williston, North Dakota averaged at a 45 cents/b premium to WTI during March, up $1.95/b from February, S&P Global Platts assessments show. So differentials would need to substantially widen.

After a larger initial drop, Rhea estimates a shutdown of DAPL would put Bakken at around a $5/b discount to Cushing WTI over the longer term.

North Dakota is keeping a wary eye on the proceedings.

"We'll all be watching. That's going to be a very, very significant event for oil production and oil prices for the state of North Dakota," said Lynn Helms, director of the North Dakota Department of Mineral Resources, during the state's monthly production webinar on March 11.

In the meantime, other pipeline operators are planning. Tallgrass Energy recently launched an open season to increase crude volumes on its 400,000 b/d Pony Express Pipeline from Guernsey to Cushing.

The move meshes with a previous open season jointly announced in March by Tallgrass and True Companies for more crude transportation from the Bakken Shale to Cushing and Texas Gulf Coast destinations that could commence as early as June 1. In late January, open seasons were announced for capacity expansions on the True Companies' Bridger and Belle Fourche systems.

How did we get here?

In 2016, construction of the Dakota Access Pipeline temporarily became the epicenter of the US environmental movement against fossil fuels, as climate activists teamed up with Native American tribes that wanted to protect their lands and waterways.

Headline-grabbing protests, security clashes and arrests ensued.

In December 2016, outgoing President Barack Obama blocked the completion of the pipeline in a largely symbolic gesture that was quickly overturned after Donald Trump was sworn in, and the pipeline came online later in 2017.

Behind the scenes, the legal fights continued over the fast-tracked environmental permitting the pipeline received under Trump. And federal Judge James Boasberg, who is hosting the April 9 hearing, stunned industry observers when he ordered the pipeline shut in July 2020. One month later, the shutdown order was halted on appeal.

Even with the pipeline's fate in question, operator Energy Transfer was still moving forward with expanding the crude pipeline's capacity by the end of 2021, although the timing is now unclear. Early construction work, including surveying and concrete pouring to build new pumping stations, began last year.

"We do not see a scenario where the pipeline will be shut-in," Energy Transfer co-CEO Thomas Long insisted on the company's earnings call on Feb. 17.

The pipeline would climb to about 750,000 b/d of crude capacity as part of the capacity expansion project, according to Energy Transfer. The company has planned to expand Dakota Access to 1.1 million b/d. But, with the ongoing coronavirus pandemic hurting crude demand, the expansion is taking a phased-in approach.