John Mayes and John Auers
In the very first week of his Presidency, Donald Trump did a a somewhat rare thing for a politician, he quickly fulfilled a campaign promise by signing two Presidential Memoranda expediting the approval process for both the Dakota Access Pipeline (DAPL) and the Keystone XL Pipeline. Construction of the two pipelines had become a lightning rod in the election, embroiled in the debate between jobs and the environment. While not officially approving the projects per se, the Memoranda essentially assured that the formal approvals would be both certain and soon. But a lot has changed in the market since these projects were first conceived and the impacts, timing and even certainty (in the case of Keystone XL) of their actual completion are complex. In today’s blog we examine these questions and the factors which will impact the answers. We also provide some background on the projects and discuss the market developments critical to the economics of each of these pipelines.
Dakota Access Pipeline
In the case of the DAPL, approval only took two weeks. On February 8, the Corps of Engineers granted an easement to the pipeline for the last, critical 1,100 feet section under Lake Oahe, a dammed section of the Missouri River. This segment is a part of the final 20 miles of uncompleted work on the 1,170 mile pipeline. Just yesterday (February 13), a request for an injunction to withdraw the easement was rejected in U.S. District Court, removing the likely final opportunity for opponents to prevent completion of the pipeline. While efforts by protestors could still slow the final completion of the pipeline, it appears very likely now that the pipeline will be completed, with startup as early as May (or even sooner).
The DAPL is a partnership between Energy Transfer Partners, Sunoco Logistics and Phillips 66 and will have a capacity of 470 MBPD. The 30” line will run from the Bakken and Three Forks fields to Patoka, Illinois, where it will connect to the Energy Transfer Crude Oil Pipeline, which when completed, will run from Patoka to Nederland, Texas. The cost of the DAPL is $3.8 billion.
In early September 2016, the Obama Administration ordered construction of the pipeline under Lake Oahe to cease. The Standing Rock Sioux had been protesting the line’s construction for months, citing fears of disturbances to burial grounds and potential water contamination. The Corps of Engineers then began a new full environmental impact statement for alternatives to the existing easement. Since September, further work on the pipeline was stymied, pending approval from the Corps of Engineers. The Presidential Memoranda in January changed this process and resulted in last week’s granting of the easement. The Standing Rock Sioux have indicated a desire to seek a temporary restraining order to again halt construction and plan to initiate protests in Washington D.C.
Because of declining output, there is currently a surplus of exit capacity (rail plus pipeline) from North Dakota. Crude production in the state peaked in June 2015 at slightly more than 1.2 million BPD and fell to a low of 964 MBPD in September 2016. Even as crude production was declining, crude movements from the state were shifting from rail to pipelines (Figure 1). Rail movements to PADD I peaked in December 2014 at 458 MBPD and have since declined to only 89 MBPD in November 2016 (the last reported monthly number by the EIA). Rail movements to PADD III peaked much earlier in May 2013.
Adding to the decline in rail movements has been the expansion in pipeline capacities. The largest of these was the startup of the Pony Express pipeline in 4Q2014 which had a capacity of 230 MBPD. While rail movements to PADDs I and III have declined sharply, movements to PADD V have held relatively constant since early 2014.
With the imminent startup of the DAPL, there will be ample surplus pipeline capacity from North Dakota for several years. Initially, most of the incremental Bakken production will likely flow south to Gulf Coast refineries. Rail movements to PADD I will only resume if U.S. crude prices decline relative to Nigerian grades to offset the higher costs of railing or if production in North Dakota rises to beyond pipeline exit capabilities.
The fate of the Keystone XL is more uncertain. First proposed in 2008, the line has been mired in political controversy and a regulatory quagmire for years. President Obama officially denied permission for the project in November 2015. Earlier that month, the pipeline owner, TransCanada, canceled its permit request in an attempt to stop the official cancelation. The pipeline became an issue again in the presidential election with candidate Trump vowing to approve the line in the early days of his presidency. Four days after his inauguration, President Trump signed the Presidential Memorandum to expedite the approval process. Two days after the Memorandum, TransCanada reapplied for the border-crossing permit.
The predicament for TransCanada is that the business environment for North America has radically changed since the pipeline was first proposed nine years ago. At that time, production in Alberta was rising rapidly and was expected to continue for many years. Exit capacity issues had already begun to plague the region and additional pipelines were necessary to facilitate continued production growth. The XL pipeline was to add over 800 MBPD of exit capacity and insure Alberta production growth for several years.
The Great Recession and low oil prices have substantively dampened expectations. While still considered robust, growth has slowed and forecasts point to even greater issues. Later this year, the Suncor Fort Hills mine in Alberta will be completed. At a cost of over C$15 billion, the mine is the last of the mega-projects that have typified Albertan growth for decades. In the last 10 years alone, the industry has spent C$227 billion on these gargantuan facilities, but later this year the last one will be completed. This does not mean no more will be built but simply that there are none in the immediate future (or being planned).
Further complicating the picture for TransCanada are the multiple competing pipeline projects. Enbridge is in the process of upgrading its system through a replacement of sections of its Line 3. Presidential approval is not necessary but some state approvals will be required. The upgrade should be complete by 2019 and will increase throughput by 370 MBPD.
KinderMorgan is also advancing the expansion of its TransMountain pipeline from Hardisty to Vancouver, BC and Anacortes, WA. While an agreement has been reached with the provincial government in British Columbia, stiff resistance remains from indigenous and environmental groups. The TransMountain upgrade would increase capacity by 590 MBPD.
TransCanada even has its own competing pipeline. The Energy East pipeline would have a capacity of up to 1.1 million BPD and would take Albertan crude eastward to Montreal and potentially St. John, NB. This line has an appeal to many Canadians in that it reduces (or eliminates) foreign imports into the eastern Canadian refineries. Like the TransMountain line however, Energy East also faces significant pushback from multiple groups.
The resulting question emerges as to whether Keystone XL is even necessary. While currently there is surplus exit capacity in Alberta, an additional pipeline will likely be necessary by 2019/2020. The Enbridge Line 3 replacement is considered very likely, which could push the date back even further for the next pipeline. An additional line would be optimum in 2020/2021. With three pipelines in the mix (XL, TransMountain, and Energy East), the winner has yet to be determined.
Turner, Mason & Company has recently issued its latest editions of the Crude and Refined Products Outlook (C&RPO) and the Worldwide Refinery Construction Outlook (WRCO). These publications evaluate numerous issues within the petroleum industry on both a global and regional basis. More information can be obtained by visiting our website at turnermason.com or calling Shanda Thomas at 214-754-0898.