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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Bakken Prices Crumble On Pipeline Woes

Oil production is growing so quickly in the Bakken that the region is starting to suffer from painful pipeline constraints.

U.S. shale is not new to pipeline bottlenecks. The Permian basin has suffered from steep discounts this year, with WTI in Midland trading as much as $20 per barrel below WTI in Houston at times. Meanwhile, the midstream bottleneck is especially acute in Canada, where the inability to build a major pipeline out of Alberta has led to price discounts that have reached as high as $50 per barrel. Western Canada Select fell as low as $15 per barrel in recent days after a U.S. federal judge blocked construction on the Keystone XL pipeline, dealing yet another blow to Canada’s oil industry.

Now, the pipeline woes could be spreading to the Bakken. Production in the Bakken has jumped this year, rising from 1.188 million barrels per day (mb/d) in January to 1.354 mb/d in November, according to the EIA’s forecast in its Drilling Productivity Report. It is a dramatic turnaround for the Bakken after it had hit a temporary peak in late 2014 at 1.26 mb/d, before falling to 0.956 mb/d two years later. Since bottoming out at the end of 2016, however, production has slowly rebounded, with a record output level expected this month.

Rising output has been good news for Bakken shale drillers, but now they face an uncertain near-term future as pipeline capacity fills up. While the Bakken is producing over 1.3 mb/d in output, the region’s pipeline systems can only handle 1.25 mb/d, according to Reuters and Genscape. With pipelines essentially tapped out, oil producers are starting to turn to rail, just as they did years ago when the Bakken first burst onto the scene.

To make matters worse, cold weather could disrupt rail loadings, an unfortunate bit of timing as takeaway capacity dwindles.

Another complicating factor is that Canadian oil producers, facing their own pipeline bottlenecks, have been shipping more oil into the U.S. via rail, which is crowding the rail networks in the U.S. at a time when Bakken producers are trying to do the same. One mitigating factor is refinery maintenance – several refineries in the Midwest are set to end their maintenance periods, which could provide some relief. According to S&P Global Platts, around 800,000 bpd of refining capacity was offline in October in the Midwest, and some of that is set to come online imminently.

The completion of Energy Transfer Partner’s Dakota Access Pipeline last year added takeaway capacity and narrowed regional discounts. But now, discounts are blowing out again with pipelines full. Last week, Bakken crude sold at a $20-per-barrel discount to WTI. “That basin is flush with barrels and there’s no way out,” Rick Hessling, senior vice president at U.S. refiner Marathon Petroleum Corp, said in an earnings call last week, referring to the Bakken. Frigid temperatures slowing rail traffic might create “a perfect storm,” he said.

Related: Aramco CEO: Expect IPO In 2021

Meanwhile, pipeline operators view the current predicament as an opportunity to build out new capacity. The Dakota Access Pipeline is full, and Energy Transfer Partners plans on expanding its capacity to 570,000 bpd, up from 525,000 bpd currently.

But larger additions could be on the way. Phillips 66 and Bridger Pipeline have announced an “open season” on a new project that would move Bakken crude to Wyoming. The proposed Liberty Pipeline would have a capacity of 350,000 bpd, with the option of expanding further, and will only move forward if there is sufficient interest. With Bakken takeaway capacity gone, it would seem likely that the two companies would find willing buyers of crude. The Liberty Pipeline, should it move forward, could come online by the end of 2020.

In the short run, however, the pipeline bottleneck will weigh on prices. After trading at a discount of just $2.75 per barrel below WTI in September, the discount for Bakken crude ballooned to as much as $20 per barrel below WTI recently. Oil in the Bakken is currently trading between $15 and $20 per barrel below WTI.

It’s a rather rapid deterioration in the market for Bakken producers, who over the summer saw their region surpass the Permian in terms of profitability. But the same problem that bedeviled the Permian – insufficient pipeline capacity – is now dragging down the Bakken.

By Nick Cunningham of Oilprice.com

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  • Frank on November 15 2018 said:
    Sounds great for Canadian consumers.
  • nobody on December 07 2018 said:
    It's actually not lack of infrastructure. It's congestion at Clearbrook due to refineries taking barrels off line. The situation is already clearing up.

    While on paper pipeline capacity equals production, about 300,000 barrels go on rail because that is the only way they can get to where they are going from North Dakota. So pipeline capacity is not yet holding the market back.

    Not to mention two companies have proposed additional pipeline capacity.

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