Why new pipeline infrastructure is critical for Bakken production

Why new pipeline infrastructure is critical for Bakken production (Part 1 of 8)

Why pipeline capacity enhancement is important in the Bakken

What is the Bakken?

The Williston Basin spreads across North Dakota, South Dakota, Montana, and parts of southern Canada. It produces oil and natural gas. The basin has a number of producing horizons—prominent among these being the Bakken, Three Forks, Madison, and Red River formations. The Williston Basin is one of the most actively drilled unconventional oil resource plays in the United States. There are approximately 175 rigs drilling in the basin, based on Baker Hughes’ weekly rig count dated June 20, 2014. A substantial portion of the Williston Basin acreage is in the Bakken formation.

The Devonian-age Bakken formation is comprised of upper shale, middle Bakken, and lower shale. The upper and lower shales act as both a source and reservoir for the oil. The middle Bakken, which varies in composition from a silty dolomite to shaley limestone or sand, also serves as a reservoir. It’s a critical component for commercial production.

U.S. vs BakkenEnlarge Graph

According to the North Dakota Pipeline Authority (or NDPA) and the Energy Information Administration (or EIA) monthly report, crude oil production in the Williston Basin of North Dakota and Montana shows oil production of over one million barrels of oil per day. By comparison, U.S. Energy Information Administration (or EIA) data show oil output increased by 220,000 barrels per day in 2012 and 260,000 barrels per day in 2013. From 2007 to 2013, total U.S. crude oil production from wellhead increased by ~47%. In comparison, crude production in North Dakota and Montana increased by ~327% during the same period.

The Bakken region now accounts for a little over 12% of total U.S. oil production. It’s expected to be the fourth region (along with the Gulf of Mexico, Eagle Ford, and Permian basins) producing more than one million barrels per day in the nation in March, 2014.

Oil ProductionEnlarge Graph

Although production in the Bakken and Williston Basin has increased by leaps and bounds in the past few years, the region has been facing the issue of insufficient oil transportation. The infrastructure bottleneck has created a differential between the producer prices and prices in the refinery regions. Some infrastructure improvements in the central part of the nation carrying more of Bakken oil to refineries have taken place since past 3–4 years. This helped narrow the price difference between the Bakken region and West Texas Intermediate (or WTI), which is priced at Cushing, Oklahoma. We’ll discuss this at length in the next sections in this series.

Bakken oil quality

According to the North Dakota Petroleum Council, Bakken crude oil gravity ranges from 36 to 44 degrees API (American Petroleum Institute—a relative measure of measure of petroleum liquid compared to water). The benchmark crude oil is WTI, which is 40 degrees API sweet crude. Since WTI oil requires the least amount of processing in a modern refinery to make the most valuable products, unleaded gasoline and diesel fuel, it’s considered a benchmark. The quality of Bakken oil is very close to WTI, making it an efficient resource base for the refiners.

Higher production at the Bakken Shale of the Williston Basin is encouraging for the midstream pipeline operators. Increased transportation requirements will be positive for crude oil pipeline suppliers in the Bakken including Enbridge Energy Partners (EEP), Energy Transfer Partners (ETP), and Plains All American (PAA). These are master limited partnerships (or MLPs). They’re components of the Alerian MLP ETF (AMLP). Increased transportation capacity would also benefit oil producers like Oasis Petroleum (or OAS), Whiting Petroleum (or WLL) ,and Continental Resources (or CLR) through higher price realization. All of these are components of the SPDR S&P Oil & Gas Exploration & Production (XOP).

The Realist Discussions

  • Michael Turgeon

    Thanks for a comprehensive article.
    My take-away is that pipelines will eventually move all the oil…..’eventually’.

    In the mean time; rail will be the main mover of the oil.
    Thus I have invested in CSX railroad, GBX for crude rail cars.