By Dec. 1, construction of the 1,172-mile Dakota Access Pipeline will be all but finished. The only thing left to build, says its owner, Energy Transfer Partners, will be about 1,100 feet of pipe to be laid beneath Lake Oahe, a sliver of water south of Bismark, N.D. The U.S. Army Corps of Engineers is reviewing the easement application by Energy Transfer, which spent much of the past two years quietly laying miles of pipe in four states before running into a national protest movement camped out near the Standing Rock Sioux Reservation.
To the protesters, stopping the pipeline is an assertion of American Indian rights and a means of ensuring that an oil spill never threatens aquifers. There are also economic and environmental stakes that reach beyond Standing Rock. Without the Dakota Access Pipeline, North Dakota’s abundant but hard-to-reach oil resources likely won’t be fully developed, potentially leaving millions of barrels in the ground.
About 200 miles northwest of the protest camp, the pipeline coils around the town of Williston, following a semicircle around the heart of the Bakken oil field, which stretches from North Dakota into eastern Montana. For years the Bakken was the fastest-growing source of crude in the U.S., with output jumping to a peak of 1.2 million barrels a day in December 2014, from less than 100,000 in 2005. The boom turned North Dakota into the second-largest oil-producing state in the U.S., behind Texas.
Unlike Texas, which has pumped oil for more than a century and is home to thousands of miles of pipelines, North Dakota never had a reason to build much energy infrastructure. As oil gushed out of remote areas miles from any town or pipeline, wildcatters, middlemen, and traders raced to get it out by truck, train, and barge. By 2015, 800,000 barrels of crude a day was being railed out of North Dakota.
Moving oil by train costs a lot more than pumping it through a pipeline, but when world crude prices hovered around $100 a barrel—as they did for several years—there was enough profit to go around. Now that prices have fallen, those transportation costs have become critical. Refineries on the East Coast, once among the biggest buyers of Bakken crude, have reverted to importing foreign oil rather than paying to ship it halfway across the country.
With oil prices below $50 a barrel, the lack of cheap transport has crimped Bakken production, raising questions about the viability of North Dakota’s oil industry. Production in the state has declined 20 percent over the past two years. That’s almost double the drop in Texas and Oklahoma, which have much easier access to pipelines and can get their oil to refiners for less money.
The $3.8 billion Dakota Access is supposed to fix that problem. It will be North Dakota’s first oil superhighway, capable of moving about half a million barrels a day out of the Bakken and into southern Illinois, home to a handful of refineries. From there, the project will link to existing pipes that connect to the oil storage hub in Cushing, Okla., and to the Gulf Coast, home to the largest refinery system in North America.
Estimates vary, but the transport costs of sending oil through the Dakota Access will be below $10 a barrel, compared with as much as $25 without it, according to Lynn Helms, director of the North Dakota Department of Mineral Resources. That’s “the difference between survival and shutdown for a lot of North Dakota producers,” says Philip Verleger, an energy consultant and former director of the office of energy policy at the U.S. Department of the Treasury. The real benefit of Dakota Access, Helms said during a Nov. 16 press conference, is “giving a known value to the transport costs, as opposed to costs that can be all over the map and change very quickly.”
While the election of Donald Trump gives the energy industry a powerful ally, there’s no set date for the pipeline’s completion. The Army Corps hasn’t indicated when it might come to a decision on the Lake Oahe easement application, though it has given protesters until Dec. 5 to vacate their encampment. Energy Transfer says it expects the pipeline to be in service sometime in the first quarter of 2017, but analysts and traders are starting to think it will be later. Mark Rossano, an energy strategist at Elevation Securities, says he thinks the pipeline might not be operational for 18 months.
Drilling has basically stopped in North Dakota. As of the end of November, only 38 oil and gas rigs were operating in the state, compared with more than 200 back in 2014. But cheap oil has forced North Dakota’s producers to get lean fast. According to Rossano, the average cost to bring a new well online has fallen to $5 million, from about $17 million a few years ago. Some of the best wells in the Bakken can produce oil for about $15 to $17 a barrel, according to the North Dakota Department of Mineral Resources. That’s on par with some of the most profitable oil fields in the world, including those in the Middle East. Yet without an efficient mode of transport, that oil will have trouble making it to market. “That’s why Dakota Access is so essential to locking in the future production of the Bakken,” Rossano says.
That future production unnerves environmentalists. Ensuring “decades of low-cost transport on Dakota Access would have huge climate implications by making it far more likely that oil from the Bakken will come out of the ground and be burned,” says Doug Hayes, a staff attorney with the Sierra Club, which opposes the pipeline. A report from Oil Change International says the amount of oil Dakota Access would move each day would have the same carbon footprint as 30 U.S. coal plants.
Some energy experts say Dakota Access is already a failed project. Cathy Kunkel, an analyst at the Institute for Energy Economics and Financial Analysis, says the pipeline is no longer needed given how much production has fallen in the state. In a report she co-authored in November, Kunkel predicts that a continued slump in oil prices will lower Bakken’s production to less than 800,000 barrels a day by the end of 2017. “At that point, existing pipelines and refineries could handle the region’s entire oil output,” she writes.
The report also cites testimony in federal court from a Dakota Access official on Aug. 18 who claimed that Energy Transfer had committed to finishing the pipeline by Jan. 1. Missing that deadline will allow companies that had signed contracts to use the pipeline to terminate their commitments, he said. That could cost Energy Transfer hundreds of millions in lost revenue. In an e-mail, a company spokesperson disputed this, saying the termination date is “further out,” but declined to give specifics.
The bottom line: Without the Dakota Access pipeline, millions of barrels of North Dakota oil could stay in the ground.
To contact the author of this story: Matthew Philips in Washington at mphilips3@bloomberg.net.
To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net.
©2016 Bloomberg L.P.
