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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Bakken Oil Patch At Risk Over Pipeline Lawsuits

One of the key factors in the survival of the Bakken oil patch in the future will be affordable transportation options. Bakken producers receive lower realized prices for their output due to the transportation costs associated with moving the product as well as the difficulty in storing it. This issue has been a persistent problem for years, but crude by rail has helped make the issue less problematic over time. Pipelines are the next step for the Bakken if it is to become a sustainable long-term oil producing area.

Yet putting in a simple pipeline may be more difficult than it appears - a state of affairs that may jeopardize the long run feasibility of shale production in North Dakota. The pertinent example here is TransCanada and its Keystone XL pipeline. TransCanada ran into an unjustified level of hostility towards its pipeline. Opponents and proponents in that debate both widely inflated claims about either the costs or benefits of the pipeline. Keystone XL would have had a modest positive economic impact on the U.S., and it would have made it mildly easier for the Canadians to ship crude. Environmentalists acted as though Keystone XL would spill millions of gallons of oil daily and wreck the ecosystem forever while proponents loudly proclaimed the pipeline the answer to a stagnant U.S. economy. Both groups exaggerated greatly. Related: BP Faces Setback In World’s Largest Unexplored Oil Basin

The same situation is starting to play out in Iowa.

Energy Transfer Partners is looking to build a pipeline that connects the Bakken to a distribution hub at Pakota, Illinois. The route crosses a 346-mile stretch of Iowa and would require that Energy Transfer Partners subsidiary, Dakota Access, which is building the pipeline, buy land from nearly 1,300 different property owners.

This type of situation is particularly difficult since the refusal of a single landowner to sell a right of way on their property can make the project unfeasible. Given that level of negotiating power, landowners can often demand huge sums for their property right of way. In situations like this, eminent domain exists to help the State push projects through. Since Dakota Access is not a State sanction utility, it’s unclear if the company can use eminent domain in the circumstances. Several property owners are suing for the right to refuse to sell a right of way to the pipeline. It’s unclear at this stage if the property owners oppose the pipeline personally or if they are simply looking for an above market payout for their right of way. In either case, the suit has the potential to impact the Bakken’s future. Related: The Biggest Winner Of The Oil Bust: Interview With Aeromexico

The $3.8 billion pipeline is facing a few other hurdles as well of course, but the eminent domain lawsuit is emblematic of the situation that affects so many major projects across the U.S. Many developments today face significant hurdles from a small minority that opposes the project for a variety of personal reasons. In some cases, projects like Keystone XL are opposed on environmental grounds, but in other cases even renewable energy projects like offshore wind farms or desert solar farms can run into trouble.

There are few easy solutions to these types of issues, given the competing needs of economic efficiency and individual rights, but it is clear that they are reducing economic competiveness and growth at a time when the country needs both.

By Michael McDonald of Oilprice.com

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