The Dakota Access oil pipeline’s opening is in limbo now that the U.S. Army has denied critical permits for a water crossing near the Standing Rock Sioux reservation.
For the pipeline’s developer, Dallas-based Energy Transfer Partners, that’s particularly bad news. Delays already have cost it nearly a half-billion dollars. Losses are tallying daily, and oil shippers could soon demand to renegotiate contracts.
But for North Dakota’s overall oil industry, the pipeline’s delay isn’t a big short-term issue since petroleum production is in the dumps. That’s not likely to change much in 2017, as the global oil glut is expected to linger.
“As production has declined, [Dakota Access] is a little less critical,” said Lynn Helms, head of North Dakota’s Department of Mineral Resources.
By mid-2018, however, the state is forecasting higher production. “Out beyond that, [Dakota Access] becomes very significant,” Helms said.
The 1,172-mile pipeline through four states is 92 percent complete. But last Sunday, the U.S. Army’s Civil Works Department denied easements for the pipeline to be built 95 feet below the bottom of Lake Oahe.
The U.S. Army Corps of Engineers had signed off on the lake crossing last summer when it approved an environmental assessment for the Dakota Access pipeline. But protests have grown since then, led by the Standing Rock tribe’s concern over the pipeline’s effect on its water and cultural heritage.
So, the Army Corps delayed bestowing easements, the final regulatory action needed for Dakota Access to cross Lake Oahe. The Army is now calling for a deeper look at alternative routes, and it’s recommending a full Environmental Impact Statement, a process that could take a year.
Energy Transfer Partners has refused to reroute the pipeline, saying it has “played by the rules,” and that the easement denial is “purely political.” The company is counting on a quick reversal of the Army’s decision when Donald Trump — a fossil fuel fan — assumes the presidency in January.
It’s not clear, though, that Trump can simply flip a switch, or whether an ongoing federal court battle over the pipeline will continue.
“We still expect [the pipeline] to happen, but it’s clearly not going to happen in the time frame that was expected,” Helms said. The pipeline was originally slated to be open to oil shippers on Jan. 1. “There could be a six- to nine-month delay, and companies are going to have to negotiate their contracts,” Helms said.
Delays mean more costs
The Dakota Access pipeline has at least nine contracts with oil shippers that reach up to 10 years, court filings say. Those contracts were signed back when the oil business was still booming and prices were considerably higher than they are now.
In a Nov. 15 court filing, Dakota Access said that delays already have cost it $450 million and that further holdups will cost “tens of millions of dollars per month.”
The Dakota Access is being developed by Energy Transfer Partners, which will also hold the pipeline’s largest equity stake. Energy Transfer says it owns the largest liquid petroleum and natural gas pipeline system in the United States, spanning 72,000 miles.
Energy Partners has been expanding in recent years, but the oil industry’s malaise has squeezed the company. Its stock is trading around $35, down from $43 per share last summer before the Dakota Access protests mushroomed (though well above its $19 low last winter when oil prices hit a 10-year nadir).
In June, Moody’s changed Energy Transfer Partner’s credit outlook from “stable” to “negative.” The credit rating agency cited the “challenging” oil and gas environment and Energy Transfer’s high debt levels.
Moody’s reiterated that negative outlook on Nov. 22 after Sunoco Logistics Partners announced it would buy Energy Transfer Partners in a $21 billion deal. The two companies are related, both controlled by Energy Partners CEO Kelcy Warren.
Moody’s said the combined company’s “consolidated leverage remains excessive,” given Energy Transfer Partners’ weak operating profit growth this year. Still, the combined company has “good liquidity” into 2017.
Energy Transfer Partners is counting on a $2 billion cash infusion from the pending sale of a stake in Dakota Access to Calgary-based Enbridge Inc. and Findlay, Ohio-based Marathon Petroleum.
When the deal — unveiled in August — shakes out, Energy Transfer Partners will own 38 percent of Dakota Access; Enbridge, 28 percent; Phillips 66 (an original partner), 25 percent, and Marathon, 9 percent.
The Enbridge/Marathon deal’s closing, however, appears to be delayed by Energy Transfer’s inability to get the easements necessary to cross Lake Oahe.
“We are closely monitoring the situation,” Enbridge said in a statement. “Closing of the transaction is subject to a number of conditions, not all of which have been met at this time. We’re working with our potential partners to understand the implications of recent developments on the transaction.”
Enbridge operates a major pipeline across northern Minnesota that moves oil from western Canada to a terminal in Superior, Wis.
Future capacity needed
North Dakota, with its relative lack of pipeline infrastructure, has relied heavily on rail transportation, which is more costly and regarded as less safe than pipelines. In October 2014 — boom times for the oil industry — 60 percent of shipments from North Dakota left by rail, and only 34 percent by pipeline.
Since then, North Dakota’s pipeline capacity and in-state refining capability has increased by about 20 percent, while monthly oil production has dropped by about 20 percent. The upshot: By September 2016, 61 percent of North Dakota oil was shipped by pipeline and 29 percent by rail.
The Dakota Access would increase the state’s pipeline capacity by 55 percent. And the pipeline would give North Dakota oil a direct, low-cost route to the heart of the nation’s refining industry, the U.S. Gulf Coast (as well as the Midwest).
The lower the transportation costs, the more competitive North Dakota crude from the Bakken fields is with oil produced in the southwestern United States.
“Although increasing amounts of Bakken crude are now being transported by pipeline, they currently must travel circuitous routes … to the Cushing, Oklahoma, trading hub and then on to the Gulf Coast,” Sandy Fielden, director of oil research at Morningstar Inc., wrote in a recent report.
“The new Bakken pipeline delivers better options for producers and will put another nail in the coffin of crude by rail transport.”
But in the short term, with oil production down, the Dakota Access is not a necessity for North Dakota’s oil industry, Fielden wrote. “It’s more of a nice to have than a need to have.”