The Dakota Access Pipeline (DAPL) is a key artery for moving crude oil out of the Bakken shale play in North Dakota, with 1,172 miles of pipelines that span from Stanley, N.D., to an oil terminal in Patoka, Ill. From there, oil can be delivered to various markets, including U.S. Midwest refineries and the Gulf Coast. DAPL's total capacity is 570,000 barrels per day (bbl/d), and we believe it is operating close to this.

With a potential DAPL closure uncertain, we frequently get asked by investors what impact this would have on our ratings on Bakken oil producers and midstream companies. Although a DAPL closure would likely widen regional oil price differentials, we do not expect a temporary closure would affect our ratings on the region's oil producers. However, a longer-term closure (12 months or more) would disadvantage them relative to more diversified peers. While the credit impact for its co-owners is readily apparent, it is less clear how a temporary or prolonged closure may affect midstream companies with exposure to the Bakken or assets that compete with DAPL for takeaway from the region.

DAPL Litigation

In March 2020, in response to a lawsuit filed by the Standing Rock Sioux tribe, a U.S. District judge ruled that the federal government had not adequately studied the environmental impact of DAPL before commencing operations in June 2017. The judge ordered the U.S. Army Corps of Engineers (USACE) to conduct a new environmental impact study (EIS). In July 2020, a U.S. District Court ordered the pipeline shut down and emptied of oil pending completion of the new EIS, although this ruling was overturned in August. Then, in January 2021, the U.S. Court of Appeals for the District of Columbia Circuit agreed with the lower court that the USACE did not meet the requirements of the National Environmental Policy Act, which warranted scrapping the permit for an easement to operate on federal lands. However, the D.C. Circuit reiterated its previous ruling that the lower court overstepped in shutting the pipeline down. Nevertheless, whether the pipeline can remain open during the EIS will again be up for court review on April 9.

The EIS will likely be completed at the end of 2021 or in early 2022. Our base assumption is that DAPL would not be closed during the review. However, this could change, as there is a growing push to do so from local tribes and environmental groups.

We Do Not Expect Rating Actions To Result From A Temporary DAPL Closure

We believe it would affect Bakken producers as higher transportation costs would be reflected in weaker in-basin pricing. However, we do not expect it would have a material impact on production volumes or our credit ratings on the region's oil producers, given the more stable oil pricing environment and our expectation for a temporary shutdown at most.

The U.S. Energy Information Administration estimates production from the Bakken averaged about 1.2 million bbl/d in February, down from highs surpassing 1.5 million bbl/d as recently as a year earlier. Production declined following the oil price collapse in March 2020, as operators shut-in wells and reduced spending on new drilling. Shut-in wells are since back online, but reduced drilling activity has lowered overall volumes. With U.S. producers eager to demonstrate to shareholders they can be more disciplined with capital spending, we anticipate more moderate production growth in 2021, reducing the likelihood that volumes will soon return to historic production, which should alleviate some impact from a DAPL closure. This lower volume has in effect freed up about 300,000 bbl/d of takeaway capacity previously accounted for.

Rail Takeaway Is Sufficient To Fill-In For DAPL

DAPL itself has the capacity to transport up to 570,000 bbl/d of crude oil, which is about 40%-45% of current total Bakken production. According to the North Dakota Pipeline Authority (NDPA), other pipelines serving the region have a combined takeaway capacity of about 800,000 bbl/d, transporting to key markets including Clearbrook, Minn., and Cushing, Okla. However, with this capacity largely contracted and being used, we expect rail or truck would most likely have to pick up any potential displaced production from DAPL, with operators likely favoring rail. We think a long-term shutdown could spur some modest expansion on competing pipelines, likely to the Cushing hub, but would not move forward unless volumes were committed on a long-term basis.

Rail takeaway capacity from the Bakken is robust, about 1.3 million bbl/d according to the NDPA, sufficient to handle all the crude that was expected in February. Having the rail infrastructure already in place eliminates much of the risk that large volumes could be stranded, which would be a far more significant scenario. The region relied more heavily on rail takeaway before DAPL and other pipelines came into operation.

Rail, however, is more costly. The estimated cost to transport a barrel of oil from the Bakken to the Gulf Coast by rail is in the $9-$11 range, whereas pipelines can get crude to Gulf Coast markets for tariffs of $6-$8/bbl. Therefore, assuming all volumes shipped on DAPL would be transported by rail increases cost about $3/bbl for roughly 45% of the region's volumes.

Chart 1

We Expect Financial Impact To Be Modest

While it is difficult to accurately quantify the impact a DAPL closure would have on Bakken pricing, we believe the additional $3/bbl transportation cost is a good proxy. Producers shipping on DAPL would be most at risk of a temporary production impact due to potential logistical interruptions while securing alternative takeaway. But we expect a similar price realization impact for all producers with Bakken exposure as the increased cost to move these barrels would be reflected in in-basin oil prices. Commentary from management teams of Bakken producers has put this added cost at $2-$4/bbl on average. In our view, it is also likely that if DAPL closed there would be an initial period with sharply weaker pricing until kinks in crude flows and takeaway logistics are smoothed out.

Most Bakken operators we rate have diversification outside of the basin, which would dilute their overall impact. We have provided possible cash flow reductions to the operators we consider to be most exposed to the Bakken under various price impact scenarios (Table 1). It is worth noting that on March 8, we revised our West Texas Intermediate crude oil price assumption for 2021 and 2022 to $55/bbl from $45/bbl. Although our cash flow estimates are under review, this increase would more than cover the added cost increase of a DAPL closure and support credit metrics on a company-specific basis. However, in a longer-term or permanent closure of DAPL with sustained wider regional price differentials, companies with material Bakken exposure would be disadvantaged relative to more diversified peers.

Effect For Midstream Companies Mixed, Significant Ratings Impact Unlikely

A possible DAPL shutdown is a bit of a mixed bag for midstream companies. The asset owners are directly harmed, but we believe the ripple effects of a short-term or longer operational stoppage will create challenges for some and potential opportunities for others. We expect an immediate short-term volume impact on crude gathering companies until producers can solve the egress problem, likely through rail cars initially and perhaps through competing options to DAPL longer term. In our view, companies with competing assets may benefit if producers look for another option out of the basin and are willing to sign long-term contracts. These midstream operators could be affected if the court stops DAPL's operations on April 9.

Energy Transfer L.P. (ET; BBB-/Negative):  We believe a temporary shutdown of DAPL would not change our view of our rating or outlook. Losing its proportional share of DAPL's EBITDA (about 36.4%) could add 30-40 basis point to ET's already elevated debt-to-EBITDA ratio in 2021, keeping leverage closer to 5.4x. However, the partnership will still have between $1.7 billion and $2 billion of discretionary cash flow available to pay down debt. We believe ET remains committed to deleveraging to 4x-4.5x over time and will use all available excess cash flow. While DAPL is still somewhat of a credit overhang for investors and producers alike, we've been consistent in our view and would revisit our assumptions only if the partnership changes its financial strategy.

For further discussion on the impact of a potential DAPL closure on its operator, Energy Transfer Operating L.P. (BBB-/Negative), see our report "Financial Ratio Refresh For Energy Transfer L.P. And DAPL In 2021" published Feb. 8, 2021.

Enbridge Inc. (ENB; BBB+/Stable/A-2):  ENB's ownership interest in DAPL only amounts to less than 2% of the company's consolidated EBITDA and will not affect our view of the rating or outlook. Its North Dakota crude gathering system could redirect some volumes to its mainline. However, the mainline generally operates at full capacity, so any benefit would be limited, in our view.

Phillips 66 Partners L.P. (PSXP; BBB/Stable):  PSXP owns 25% DAPL and Energy Transfer Crude Oil Pipeline (ETCO), which collectively accounts for about 20% of PSXP's total EBITDA. PSXP's stand-alone credit profile is 'bbb-', and it receives a one-notch uplift from its owner and general partner, Phillips 66. Losing DAPL cash flow would certainly pressure PSXP's stand-alone credit profile, increasing debt to EBITDA by almost a full turn. That said, we estimate PSXP's leverage ratio would be about 4.3x, slightly below the 4.5x downgrade trigger for stand-alone credit measures. We believe Phillips 66 will continue to support its midstream subsidiary, which is unlikely to cause a rating change at PSXP.

Marathon Petroleum Corp. (BBB/Negative/A-2)/MPLX L.P. (BBB/Negative):  Marathon's interest in DAPL helps secure feedstock and connectivity to its Midwestern refineries, while MPLX's Bakken logistics assets increase the group's crude access and margins opportunities. In our view, this flexibility is hindered somewhat with DAPL offline and will limit some optionality but is unlikely to materially change Midwestern refining margins or credit measures at MPLX.

ONEOK Inc. (BBB/Stable/A-2):  We believe natural gas gathering and natural gas liquids raw feed throughput will continue on ONEOK's Bakken acreage, given the strengthening in crude oil prices and large inventory of drilled but uncompleted wells. However, volumes could drop if DAPL operations are stopped for a prolonged period, which we think could reduce EBITDA $50 million-$100 million in our downside case. ONEOK has indicated it is closer to the lower end of the range because producers arranged rail capacity or found pipeline alternatives to maintain production. We expect ONEOK's debt to EBITDA to be about 4.5x in 2021 and to decrease to about 4x in 2022. Any weakness in 2021 not offset or addressed could pressure the rating. With crude oil prices closer to $60/bbl, credit measures could come in stronger than we forecast. At that price, producer netbacks from rail is still attractive and could stimulate drilling activity in the region.

Kinder Morgan Inc. (KMI; BBB/Stable/A-2):  We think KMI could benefit from some spot volume uplift on its Double H crude oil pipeline, or perhaps a pump expansion project if producers look to commit new volumes during a prolonged outage. A possible but less certain offsetting factor is the effect on the legacy Hiland crude gathering systems to the extent a shutdown limits crude oil production in the basin.

Hess Midstream Operations L.P. (HESM; BB+/Stable):  We do not think HESM's credit quality will be affected by the DAPL outcome. Its supportive contract structure includes minimum volume commitments and rate resets, which largely insulate the company from Hess Corp.'s drilling program. There are also other options for Bakken crude, including HESM's rail terminal, which is underutilized.

Crestwood Equity Partners L.P. (BB-/Negative):  Crestwood could be modestly affected by a DAPL shutdown, as its producer customers on its Arrow crude gathering system would need to find downstream alternatives to clear crude barrels. Producers have had some success diversifying takeaway options, which will mitigate the harm from a DAPL shutdown. The Arrow system connects to the DAPL, as well as pipelines owned by KMI and MPLX. Crestwood can also move Arrow crude volumes to its COLT Hub terminal by pipeline or truck. Barrels can then be moved by rail, with capacity of about 160,000 bbl/d. However, Bakken volumes account for about 50% of Crestwood's EBITDA, so any long-term disruption from DAPL could affect cash flow. Crestwood's credit measures are pressured from pandemic-related price and demand destruction, although we expect some balance sheet improvement in 2021.

Tallgrass Energy Partners L.P. (B+/Negative):  Volumes could increase on Tallgrass's Pony Express pipeline as producers look for takeaway security. Volumes on the pipeline, which transports crude oil from Guernsey down to the market hub in Cushing, have been increasing, mostly due to higher production in the Bakken. If additional volumes are committed, it may require some capital to clear the bottleneck egress out of the basin, which we'd view as supportive of credit quality.

Paradigm Midstream LLC (B-/Negative):  Paradigm's operations cover about 200,000 dedicated acres in the Williston Basin. About 40% of 2021 EBITDA is supported by minimum volume commitments. In our view, sustained higher crude prices would provide incentives to add rigs and support increased drilling activity on the company's acreage. We think volumes could be pressured if DAPL is offline for an extended period.

No Ratings Impact Anticipated On Bakken Operators

Continental Resources Inc. (BB+/Negative/--):  It was the top producer in the play in 2020, with Bakken oil production of 190,000 bbl/d. Although Continental only has 3,550 bbl/d committed to DAPL, we expect it would be affected by wider price differentials. The Bakken accounted for about two-thirds of Continental's 2020 oil production.

Hess Corp. (BBB-/Stable/--):  It averaged 107,000 bbl/d from the Bakken in 2020, about 60% of its total oil production. Hess ships about 55,000 bbl/d of its Bakken oil production through DAPL but has access to Hess Midstream Operations L.P.'s rail terminal and rail cars with more than sufficient capacity.

Marathon Oil Corp. (BBB-/Stable/A-3):   About 40% of its total 2020 oil production was from the Bakken, where it averaged 79,000 bbl/d. Marathon ships about 10,000 bbl/d on DAPL.

Northern Oil and Gas Inc. (NOG; B-/Stable/--):   Almost 100% of NOG's 2020 oil production was from the Bakken, where it holds non-operated interests with a broad group of operators. The company does not disclose its volumes shipped on DAPL. In February, NOG announced an agreement to purchase producing Appalachian gas assets, which will account for about 25% of its 2021 total production, providing diversification outside of the Bakken.

Whiting Petroleum Corp. (NR/--/--):   Whiting derived about 90% of its 2020 oil production from the Bakken, making it one of the public operators most weighted to the region. The company has not disclosed its volumes shipped on DAPL.

Oasis Petroleum Inc. (NR/--/--):   More than 80% of its 2020 oil production came from the Bakken, and Oasis uses DAPL to move an undisclosed portion of its volumes. Oasis has noted it has prepared for a possible closure by arranging alternative takeaway and entering into fixed differential agreements.

Table 1