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US judge orders Dakota Access crude pipeline shut by Aug 5, vacates permit

Highlights

Army Corps expected to appeal, but may face tough odds

New environmental review would take at least 13 months

Bakken spot activity thin, prices edge lower

Washington — Energy Transfer's 570,000 b/d Dakota Access Pipeline must stop service and be emptied of crude oil by August 5, a US appeals court judge ruled July 6 in an unexpected blow to the system that delivers Bakken production to Gulf Coast refiners and exporters.

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The ruling by US District Court for the District of Columbia Judge James Boasberg vacates DAPL's permit allowing it to cross the Missouri River at Lake Oahe in North Dakota.

Boasberg ruled that the seriousness of the Army Corps of Engineers' deficiencies in granting the easements "outweighs the negative effects of halting the oil flow" for the 13 months that the Corps said it would need to conduct a new environmental review.

Energy Transfer said that it will "immediately file a motion to stay this decision, and if not granted, to pursue a stay and expedited appeal with the Court of Appeals," to keep the pipeline flowing.

"We believe that the ruling ... from Judge Boasberg is not supported by the law or the facts of the case," the company said in a July 6 statement. "Furthermore, we believe that Judge Boasberg has exceeded his authority in ordering the shutdown of [DAPL] which has been safely operating for more than three years."

"We also believe that the Army Corps of Engineers has the ultimate jurisdiction over this matter, pursuant to its regulations governing Corps property," it added. "The economic implications of the Judge's order are too big to ignore and we will do all we can to ensure its continued operation."

The four-state Dakota Access line originates in North Dakota and runs to a hub near Patoka, Illinois, where it connects with the Energy Transfer Crude Oil Pipeline to Nederland, Texas. The system provides an outlet for crude producers in the Bakken and Three Forks areas of the Williston Basin to ship their barrels south.

Bakken crude producers also spoke out against the ruling.

"As an original and historic shipper from the Bakken, Continental has the bulk of its oil on alternative pipes.That being said, we believe that today's DAPL court decision is harmful to royalty owners, the state of North Dakota and the American consumer. This decision will serve to drive the price of crude higher," said Continental Resources spokesperson Kristin Thomas in a statement.

"Shutting down the pipeline will have a greater negative impact on safety than any environmental benefit the court is claiming to gain, putting more trucks on our roads, and more rail cars on the tracks, nearly 900 railcars per day," said Ron Ness, President of the North Dakota Petroleum Council, in a statement. "Shutting down the pipeline will cut off North Dakota oil producers from the safest, most reliable and economic method of transporting our high-quality Bakken oil to the best markets in the country. Increased rail traffic will impact North Dakota and regional farmers by creating rail capacity issues as harvest season ramps-up this fall."

The ruling came one day after another midstream project was cancelled -- the 1.2 Bcf/d Atlantic Coast Pipeline. A key reason was purportedly an April ruling by a US District Court in Montana that put the US Army Corps of Engineers' permitting program allowing gas and oil pipelines to cross bodies of water and wetlands at risk. Energy experts claimed that decision, involving a case brought to block the Keystone XL oil pipeline from Canada, imperiled dozens of other domestic projects.

Calling DAPL's closure and the ACP cancellation "setbacks for US energy leadership," the American Petroleum Institute said July 6 it was "deeply troubled" by both outcomes.

SPOT MARKET THINS OUT

Bakken spot crude traders were surprised by the ruling, but activity was thin for August barrels as the market tried to adjust to the development.

One Rockies crude trader expected few August spot trades until the picture of DAPL's potential closure becomes clearer.

"Everyone's trying to figure out whether this DAPL thing can really happen or not," the trader said.

The S&P Global Platts assessment for Bakken crude in the Williston Basin for injection into DAPL was assessed at WTI CMA minus $3.80/b, down 20 cents from the prior trading day.

Bakken at Clearbrook, Minnesota was heard bid at WTI CMA minus $3/b and offered at minus $1/b. Platts assessed Bakken Clearbrook 20 cents/b lower at WTI CMA minus $2.20/b.

Bakken in Guernsey, Wyoming was heard traded at WTI CMA minus $2.35/b, also down 20 cents.

Any further discounting of Bakken crudes will likely also weaken prices for Canadian sweet grades, which compete with Bakken, one trader said.

Another trader said the severity of any Canadian crude price fallout will depend on how many of the excess Bakken barrels the Enbridge Mainline system can take.

Light sweet pipeline crude on the US Gulf Coast was trading stronger early July 6. A crude oil broker said differentials for WTI at the Magellan East Houston terminal rose on the DAPL news to a $1.30/b premium to WTI at Cushing, Oklahoma, which was up about 20 cents/b from where it was trading before the Independence Day holiday.

CRUDE-BY-RAIL OPTION

North Dakota crude production fell below 1 million b/d in May from 1.4 million b/d in March as the coronavirus pandemic pushed oil demand, and prices, lower, S&P Global Platts Analytics data shows.

Roughly 100,000 b/d of takeaway capacity from the Bakken will disappear over the course of 2020, to 1.25 million b/d by year-end, according to Jean Ann Salisbury, an analyst at research consultancy Bernstein. Thus, if 570,000 b/d of DAPL capacity vanishes, that will leave just around 700,000 b/d of refining and takeaway capacity for Bakken crude.

"This would suggest a notable blowout when the DAPL shutdown starts, as shippers scramble to line up new crude by rail options," she said, adding she believes most other pipe evacuation capacity is fully contracted.

Roughly 500,000 b/d of Bakken would need to move by rail, she said. That level of Bakken crude has moved before by rail although volumes have not been that high since 2015, she added.

"History would suggest an elevated differential to move more -- perhaps $20/b to $25/b Bakken differential versus Brent versus $15/b-$20/b the past year," she said.

Salisbury said with a $43/b Brent futures curve for 2021, "this would suggest a Bakken price in the low $20/b range, barely enough to cover cash costs and not enough to incent new rigs from today."

As a result, "we would expect production to settle at around 900,000 b/d-1 million b/d -- the amount of pipeline takeaway plus non-displaceable rail to the West," she said.

PERMANENT SHUTDOWN POSSIBLE

Katie Bays, managing director of FiscalNote Markets, predicts the ruling will be "highly disruptive." She expects the Corps to appeal the opinion immediately, "but we are skeptical that they will be successful."

"In recent appeals, Circuit Courts have shown significant deference to lower court decisions, even with disruptive consequences," Bays said in a note to clients.

A fresh environmental review could put the fate of the project in the hands of a future Joe Biden administration if US President Donald Trump loses his reelection bid in November.

Rapidan Energy Group put the odds of a temporary stay of the order on appeal at only 30%, meaning a shutdown would likely last at least 10-12 months if Trump wins reelection or become permanent if he loses. Rapidan predicts a potential Biden White House would refuse to conduct a new environmental review, resulting in the pipeline never restarting.

"The court's impatience with the Trump administration's causal approach toward environmental reviews has boiled over," Rapidan said in a note to clients. "After finding three times that the Army Corps of Engineers failed to conduct a sufficient environmental impact statement as required by the National Environmental Policy Act, a fed-up DC District Court Judge Boasberg dropped the bomb."

Bays said that if Biden wins, a delay of service to mid-2021 represents an "inside estimate."

"A new [Corps leadership] may take even longer to address the permit deficiencies, or other Administration policy choices could further bog down the process," she said.

In March, Boasberg ordered the Corps to conduct a new environmental impact statement for the pipeline, which requires a more substantial environmental study than what was completed previously.