DAPL’s Future Uncertain; Deeper Bakken Price Discounts Possible

July 10, 2020July 28th, 2020
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Update 7/14/2020: Dakota Access Pipeline may still operate after a stay was issued by an appeals court (read more here). On July 6, a U.S. judge ruled the Dakota Access pipeline (DAPL) must stop service and be rid of its crude oil by August 5. Read more on the initial ruling here. The outcome of the case could disrupt the flow of oil from the Bakken region and could cause deeper price discounts to local producers.

The removal of DAPL would decrease pipeline takeaway capacity by 570 MBbl/d for the Bakken region, redirecting barrels to leftover space on other outbound pipes and crude-by-rail. In the past, the discount for Bakken crude to WTI at Cushing has widened to $5-$20/Bbl when supply exceeded the lowest cost takeaway capacity. The introduction of DAPL in 2017 helped change that. Since then, the “normal” discount for Bakken crude, compared to WTI Cushing, has been about -$1 to -$2/Bbl, except for short periods of infrastructure interruptions.

The Bakken without DAPL removes about 35% of the shale play’s pipeline takeaway capacity.  Production growth in the region would likely need to access higher cost transportation options like trucking and rail if the largest Bakken pipeline is removed from service. Such additional costs could cause deeper discounts to Cushing for the marginal barrel. Discounts could balloon in order to move more Bakken crude to the Gulf Coast or elsewhere. If more rail capacity needs to be incentivized, Bakken discounts would likely have to fall to historically observed rail transportation costs of -$7 to -$15/Bbl, depending on the final destination.

The Bakken Clearbrook differential, as shown above, has not yet reacted in a material manner since Monday’s announcement. In fact, near-term pricing for Bakken at Clearbrook has improved over the past few days, although not quite back to July 3 levels, after Energy Transfer signaled that they would not be shutting in the pipe.

For now, DAPL’s capacity may not be needed as about one-third of Bakken crude is apparently still shut-in.The short-term response in the Bakken may be muted even if the pipeline is shut down due to the amount of oil production shut-in because of low prices. The chart below shows current production is less than outbound capacity even without DAPL.

Other corridors may provide just enough capacity for now. Eastbound pipeline flows on Enbridge’s North Dakota Pipeline (NDPL) can flow just over 200 MBbl/d. A few hundred thousand barrels a day of capacity can flow north into Canada, and just over 300 MBbl/d can go to the Guernsey market by way of Butte and Double H pipelines. Utilization on these pipelines is likely high.

Bakken producers have recently shipped between 150-200 MBbl/d to the West Coast (PADD 5) to capture Brent-linked pricing. CBR shipments to the East Coast (PADD 1) have been between 100-150 MBbl/d lately. Railed volumes to PADD 3 were higher in 2013-2015, but had dropped to around 50 MBbl/d, even before DAPL arrived.

The other PADDs’ markets may be able to absorb more CBR crude. However, doing so implies steeper discounts for crude in-basin for Bakken producers.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com

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