What Happens in Dakota Doesn't Stay in Dakota
Pipes aren't things you really want to have to think about, and you usually only do so when something goes wrong. The same holds whether it's a blocked u-bend in your house or, you know, an oil pipeline exploding.
Besides the Colonial explosion, there is an ongoing protest against Energy Transfer Partners LP's Dakota Access pipeline project, which is designed to bring oil south from the Bakken shale. Meanwhile, activists sympathetic to the protesters in North Dakota sabotaged several cross-border pipelines carrying Canadian crude oil into the U.S.
As a general rule, the words "pipelines" and "sabotage" appear in oil news from places like Nigeria or Iraq, so this domestic disruption is striking. But it shouldn't be, really. Ever since the Keystone XL pipeline was stymied by concerted protests and lobbying, it has been obvious that if opposition to fracking or oil-sands development doesn't always succeed, choking off the route to market presents an effective alternative.
You don't have to block off an oilfield entirely from customers. You just have to make it more expensive. Here are how three different types of North American crude oil -- from Canada, the Bakken shale and the Permian shale in west Texas -- have traded relative to the benchmark West Texas Intermediate price in recent years:
The quality of crude oil matters, of course; harder-to-process heavy grades from places like western Canada naturally get a discount anyway. But the cost of transportation matters, too. While a pipeline might ship oil at a cost of $3 or $4 a barrel, resorting to rail can shift that to more than $10 -- which hurts a lot more with benchmark crude prices in the $40s rather than above $100.
It's unclear at this point whether or not Dakota Access will go ahead as is. But President Obama's latest intervention, via an interview this week, suggests ever more strongly that a final decision may have to wait until the next administration. And disasters like the Colonial explosion certainly don't help the industry's cause.
The bigger point point is that, as the oil sector contemplates the recovery of North American output after the price crash, the issue of market access has assumed even more importance. While the industry won a major victory in getting the export ban on crude oil lifted, it won't help producers unable to get their barrels profitably to the coast or a refinery.
In a recent report, Wood Mackenzie compared the location of major shale basins with tribal lands and pipeline routes. It's important to remember there isn't united tribal opposition to oil pipeline routes, as even the Dakota Access saga shows. Here's Wood Mackenzie's map:
You can see the difficulty here for Bakken shale producers in terms of getting more routes south.
As the map shows, for example, the shale du jour, the Permian, cements its advantage even more on this front, being right next to the biggest refining complex in the world and with no state boundaries or reservations in between.
In an echo of the Keystone XL fight, the place to watch right now is Canada. Besides the recent sabotage on pipes heading south, it has several major projects currently under review and facing challenges of their own, with decisions on permitting expected soon.
One to watch is Kinder Morgan's Trans Mountain Expansion, designed to take oil from Alberta to Canada's west coast. The project faces protests of its own, but Kinder Morgan expressed confidence on its recent earnings call that it will be approved, and that looks well-placed. A decision is expected next month. If it doesn't get the go-ahead, or gets delayed, "it would send a chill down the spine of Canadian producers" says Afo Ogunnaike, a senior analyst at Wood Mackenzie.
For pipeline companies, canceled or delayed projects frustrate growth but, on the upside, should make existing assets more valuable.
As for the exploration and production sector, Ogunnaike points out that blocked or delayed pipelines don't spell the end of output growth out of places like Alberta or North Dakota. A recovery in headline oil prices, for example, would provide more of a cushion to absorb higher transportation costs. And indeed, if pipeline problems slow supply growth in North America, the feedback loop in the market should help to raise global oil prices.
Which, in the context of OPEC's fumbling attempts to aid this process, raises a curious notion: that Saudi Arabia and its peers may be quietly rooting for those protesters in North Dakota.
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