The Fuse

Problems for the Bakken Begin to Mount

by Nick Cunningham | July 20, 2020

In early July, a federal judge ordered the Dakota Access pipeline to shut down, a move that could potentially remove 570,000 barrels per day of takeaway capacity from the Bakken shale formation.

The pipeline closure would be another blow to a prominent shale region that has already contracted as a result of the coronavirus and the market downturn. With the challenges piling up, the Bakken may struggle to rebound.

The Dakota Access decision
The Dakota Access pipeline moved about 40 percent of the Bakken’s pre-pandemic oil production, and it has been operational for three years. A judge vacated an authorization for the pipeline to operate, ordering the Army Corps of Engineers to redo an environmental impact statement, a process that could take more than a year. The decision was a historical victory for the Standing Rock Sioux, which has fought the project for years. The judge said the pipeline needed to shut down by August 5, although the company received a temporary stay while legal procedures continue.

The fate of Dakota Access could depend very heavily on the outcome of the presidential election.

The fate of Dakota Access could depend very heavily on the outcome of the presidential election. If President Trump is reelected, the Army Corps could redo the environmental impact statement and bring the pipeline back online. But the election of former Vice President Joe Biden could result in the pipeline permanently forced offline. The prospects for Dakota Access would be much worse if the market remains in the doldrums, according to ClearView Energy Partners, as removing midstream capacity from an oversupplied market would be much less painful than if the market were tight.

Without Dakota Access potentially sidelined, the Bakken could see its crude discounted below WTI, with more crude hitting the rails. Over time, as much as 200,000 barrels per day (b/d) of additional oil could move by rail, on top of the 300,000 b/d already moving by rail, according to the Bismarck Tribune. Rail is more costly, however, and raises safety risks. When crude-by-rail shipments peaked a half-decade ago, explosions and derailments occurred with alarming frequency.

Notably, however, the recent discounts for Bakken oil relative to WTI have been surprisingly narrow, especially given the fact that Dakota Access’ days may be numbered. One reason for that is the fact that the pipeline hasn’t actually shut down yet. But another reason for the “lack of pressure that one might expect from such a large looming reduction in offtake capacity is massively reduced Bakken crude production,” JBC Energy said in a note. “As such, despite the pipeline closure threatening to slash offtake capacity by 570,000 b/d, it is unlikely that Bakken Clearbrook will be massively pressured vs Cushing, even in the short term as shut-in shale wells are restarted” JBC added, referring to the regional benchmark.

“Every operator was shutting in everything”

North Dakota’s oil production plunged by 30 percent in May, down to 850,000 b/d. That was the lowest level of output in seven years. “Every operator was shutting in everything,” North Dakota Director of Mineral Resources Lynn Helms said, according to the Williston Herald. “We just saw a tremendous decline.”

Even as oil prices have steadied, drilling remains very depressed. The Bakken is high-cost relative to the Permian, and the rig count is at multi-year lows. The rig count in the Williston basin (of which, the Bakken is a part) is down to just 10 active rigs, according to Baker Hughes. As recently as March, there were more than 50 rigs drilling in the basin. The severe slowdown in drilling means that oil production in the Bakken won’t bounce back anytime soon. JBC says that production will remain at around 1 million barrels per day for the remainder of the year, “which should help manage the fallout should the pipeline shut down.”

The April 1 bankruptcy of Whiting Petroleum, a large producer in the Bakken, suggests that the shale formation’s financial struggles pre-date the pandemic.

Obstacles mount
Nevertheless, even if output is down and drilling remains subdued, the shuttering of such a major pipeline would be another blow to the Bakken. “The only completion activity we are aware of is a company with a lot of hedges,” Lynn Helms said. “And that company, though, is moving that oil through Dakota Access. They had protected themselves from the market, but they are not protected from a DC Circuit court decision, so we will see how that all plays out.”

But the threats do not end there. In a much lower-profile case, the U.S. Interior Department’s Bureau of Indian Affairs recently ordered the shutdown of the Tesoro High Plains pipeline, another oil conduit that passes through the Bakken. The agency determined that the Tesoro pipeline trespassed on Native American lands – the company now must pay $187 million and close the line, although it can file an appeal. The outcome is as of yet unknown.

One of the big questions facing the U.S. shale industry at this point is whether or not the sector will see consolidation.

One of the big questions facing the U.S. shale industry at this point is whether or not the sector will see consolidation. The $13 billion purchase of Noble Energy by Chevron was the first big move by the oil majors since the downturn began. But there are too many companies that are unable to turn a profit. “[T]he reality is that the shale boom peaked without making money for the industry in aggregate,” Deloitte said in a June report. “In fact, the US shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies since 2010.”

Deloitte said that consolidation was necessary, but warned that being “adventurous” could prove “fatal.” The consulting firm said that about 50 percent of the companies in the sector are “superfluous,” and should be avoided.