Since 2017, the Dakota Access Pipeline has been operating without a spill, but an unprecedented ruling by an Obama-appointed judge has directed that the pipeline must be emptied within 30 days—an extremely expensive and difficult undertaking even if a greater amount of time were granted. The $3.8 billion pipeline is over 1,100 miles long and transports 570,000 barrels of oil per day from North Dakota to Illinois. The ruling closes the largest artery transporting crude oil out of North Dakota’s Bakken shale basin to Midwest and Gulf Coast regions, relegating the oil to be shipped by rail instead—a more costly, less safe and more environmentally risky means of shipment.
According to the ruling, the U.S. Army Corps of Engineers violated the National Environmental Policy Act (NEPA) when it granted an easement to Energy Transfer to construct and operate a segment of the oil pipeline beneath Lake Oahe in South Dakota because they failed to produce an adequate Environmental Impact Statement (EIS). Preparing a thorough EIS could take about thirteen months, according to an estimate by the Army Corp of Engineers.
The court order would hurt state, local, and tribal tax revenue and force oil producers to move oil by railroad. According to some operators the cost for rail is almost three times more than the cost for pipeline shipment—$10 to $14 per barrel for rail compared to $4 to $5 per barrel for pipeline.
If the decision is not reversed on appeal, shutting down the Dakota Access Pipeline will have devastating consequences on North Dakota’s economy and America’s energy security. It will deprive Americans of affordable energy, throw the country’s crude supply system out of balance, and jeopardize U.S. global standing.
Bakken Wells May Be Shut-in Longer
A lack of adequate pipeline takeaway, combined with the need to obtain other modes of oil transportation, requiring rail car availability and crews, may result in keeping Bakken wells that were idled in May and June due to depressed oil demand and low oil prices from the coronavirus pandemic shut-in longer. Shutting down the Dakota Access Pipeline will increase the cost of getting Bakken production to markets as the pipeline is the lowest cost means of transporting Bakken oil. The lower netback from higher transportation costs to producers could stall or slow the return of production for the Bakken basin. Transporting both existing and shut-in Bakken production by rail to the East Coast would add substantially to transportation costs, putting pressure on in-basin differentials and making the economics very challenging at current oil prices.
Operators continued to bring back oil production from the Bakken and other plays during April through June as oil prices have risen just above $40 per barrel. With oil production in North Dakota averaging about 925,000 to 970,000 barrels per day in mid-June due to the pandemic-related shut-ins versus about 1.45 million barrels per day pre-pandemic, there may be enough excess rail capacity to accommodate the Dakota Access pipeline levels. Crude by rail out of the Bakken has been averaging around 300,000 barrels per day in the last six months.
The added $5 to $10 per barrel cost of rail to get Bakken crude to markets, however, could keep other production shut-in. The Bakken’s internal rate of return in June was only at about 10.5 percent with the pipeline operating. If the appeal process is unsuccessful, a number of producers with multi-basin exposure could shut down drilling and completions in the Bakken into the 4th quarter of 2020 and shift capital towards the Midcontinent, Permian Basin, and Eagle Ford for next year. The Bakken has been the slowest to return volumes to service of the major oil basins. The rig count has severely plummeted in the last four months with just 10 rigs operating in the Bakken for the week ended July 1, from 53 in mid-March.
Petroleum Product Prices Could Increase
Prices for gasoline and diesel in the Midwest could rise in the coming months because of the court ruling. The Dakota Access pipeline is the primary route for oil produced in the Bakken—the second-largest shale basin in the nation—and its oil is a staple for some refineries supplying the city of Chicago and the Midwest. The closure of the pipeline will drive up the transport cost of crude to refiners, or force them to pay for alternative supply from elsewhere, which will increase the cost of the fuel they produce. Bakken oil is an important component of the Midwest crude slate, and as the only direct transportation service for Bakken oil to the storage hub at Patoka, Illinois, the Dakota Access Pipeline is a significant logistics asset for Midwest refineries.
This ruling only adds to the supply problems that Midwest refiners face. Crude supply in the Midwest was constrained earlier this year from a court ruling that Canadian pipeline operator Enbridge had to halt operations for its Line 5 that carries oil to refineries in Michigan and Ohio.
Conclusion
The ruling by a U.S. appeals court judge will hurt oil production in the Bakken and increase gasoline and diesel prices for Mid-westerners as producers turn to rail shipment and or refiners find alternative oil supplies. Shipping oil by rail is more expensive, less efficient, and more environmentally risky than shipping it by pipeline. Because time-consuming and expensive steps are required to shut the pipeline down safely and empty it of oil, the process could take well more than the 30 days that the court has allowed.
The keep-it-in-the-ground movement has increasingly turned its attention to pipelines rather than wells because they require various federal and state permits, which can be more easily litigated. This court ruling reflects the increasing legal uncertainty regarding large-scale energy and industrial infrastructure development in the United States. The nation’s outdated and convoluted permitting rules are opening the door for activist-led litigation, undermining American energy progress and denying local communities the environmental, employment, and economic benefits that pipelines provide.
