ANTI-FOSSIL FUEL environmentalists have targeted pipeline projects for the past year or so because of their high visibility and the ability of protesters to get media coverage. In some instances, such as with the Dakota Access Pipeline (DAPL), Native Americans have joined the protesters as they sought to prevent the pipeline from crossing ancestral homelands. While the Obama administration occupied the White House, these projects were pretty much stalled. Since January, however, the Trump administration has indicated a willingness to move these projects forward.
That is good news for oil producers in the Bakken that have long been constrained in getting their product to markets due to lack of midstream infrastructure. Transportation constraints have caused prices for Bakken crude to drop below that in more accessible plays, which is an additional blow to producers operating in the region who were hit hard by the price slump in 2015-16. According to S&P Global Ratings, a third of US oil and gas firms defaulted last year, and low prices were a contributing factor. However, Bakken operators now have a reason for optimism. The Energy Transfer Crude Oil Pipeline (ETCOP), a converted natural gas pipeline that connects with DAPL, is nearly complete and will soon begin transporting Bakken crude to the Sunoco and Phillips 66 storage terminals in Nederland, Texas, providing access to Gulf Coast refineries.
According to Genscape, ETCOP was originally expected to go online in the fourth quarter of 2016, but the startup was postponed due to delays associated with DAPL. The 30-inch pipeline connects with DAPL in Patoka, Illinois and runs 744 miles to the Texas Gulf Coast.
In another policy reversal, the Trump administration announced on March 24 it would issue a permit for construction of the Keystone XL pipeline, which would link oil producers in Canada with refineries and export terminals on the Gulf Coast. Reversing the position of the Obama administration, the announcement followed a 60-day review by the Trump team, which had prioritized the project. The pipeline has been the subject of a protracted fight between environmentalists and the oil and gas industry, which says it will spur economic growth, create thousands of jobs during the construction phase, and help move the United States toward energy independence.
Former ExxonMobil chairman and CEO Rex Tillerson, who now serves as US secretary of state, recused himself from the Keystone XL decision. The permit was signed by Thomas Shannon Jr., undersecretary of state for political affairs.
Initial expectations for the Keystone XL pipeline project had been a two-year construction timeline, which would have placed the line in service by mid- to late-2019. After all the protests and delays, Keystone XL supporters now say that it is likely the project will not be fully operational until mid-2021.
When completed, the pipeline will deliver up to 830,000 barrels of crude oil per day, mainly from Canada's oil sands in Alberta, to Steele City, Nebraska, where it will connect with an existing pipeline network and be transported to heavy oil refineries on the US Gulf Coast. Analysts say it is likely that much of the Canadian oil will then be re-exported as refined products to overseas markets.
In an analysis dated March 24, S&P Global Platts says that marketable crude oil from Western Canada is expected to average 5.4 million barrels per day in 2021, which is more than 1.0 million barrels above where production is expected to be in 2017. With pipeline takeaway constrained, this has meant that crude needs to be moved by rail cars. Last year, two to three unit trains per day were needed to transport oil out of the region. By 2019, this is expected to increase to four to five unit trains per day. Even when Kinder Morgan's Trans Mountain expansion goes on stream in 2020, some Canadian crude will still have to be shipped by rail.
Platts points out that Mexico, which has seen a steady decline in oil production, typically provides Gulf Coast refiners with most of the heavy crude refined there. In 2016, the percentage was down to 40%, about half of what it was at the start of the decade. New production from Mexico is expected to fall firmly on the lighter end of the spectrum.
"As US refiners struggle to absorb resurgent domestic light production, it seems likely Mexico might need to look further afield to sell its new light crudes," says Platts. "That leaves the door wide open for the heavy Canadian crudes expected to flow down the Keystone XL."
