On April 9th, the Army Corps of Engineers will decide whether to shut down the Dakota Access Pipeline (DAPL) or allow it to continue to operate. Democratic lawmakers have ramped up their pressure on the Biden Administration to close the pipeline as it awaits the results of a court-ordered environmental impact statement. Even though Bakken production has fallen considerably because of the pandemic, US crude markets would be shaken up by the shutdown of the primary link from the Bakken to Midwest and Gulf Coast markets. Today’s Energy Market Insight will discuss what some of the potential impacts could be if the Army Corps and the Biden administration decide to take DAPL out of service.
The first impact of a DAPL shutdown would pertain to crude flows out of the Bakken, as detailed in the chart below and sourced from BTU Analytics’ Oil Market Outlook. Should DAPL be shut down, shippers would first turn to the remaining pipeline routes out of the basin and most notably favor pipelines flowing to Guernsey, WY. At the time of the modeled DAPL shutdown, BTU Analytics expects an expansion from Bridger to enter service. However, the increased pipeline capacity would be insufficient to move all the stranded DAPL barrels. Thus, a rapid increase in crude-by-rail volumes to the East and West coasts would need to occur. Rail volumes have suffered the brunt of production declines in the Bakken throughout 2020, given that rail is typically among the most expensive routes out of the region. Crude by rail out of the Bakken plummeted from an average of 310 Mb/d in 2019 to less than 180 Mb/d in 4Q 2020.
As producers’ reliance on these more expensive routes increases following DAPL’s closure, in-basin pricing is also expected to be impacted. Utilizations of oil pipelines would likely spike above 90% and push producers towards crude-by-rail. As pipeline infrastructure tightens, even with the new Bridger capacity highlighted above, BTU Analytics models the in-basin pricing would widen to WTI and average near-2016 levels of about $6.50/bbl from mid-2021 through 2023. This contrasts with recent differentials in the Bakken, which have tightened considerably to WTI as production has declined. Without a DAPL shutdown, these tight differentials are expected to continue in the near-term.
Bakken producers are not the only ones that could be left reeling if DAPL is ordered to close. Numerous refineries depend on Bakken crude throughout the US. Of note, more than 100 Mb/d of Bakken crude is unloaded in Patoka, IL before the remainder continues onto the Gulf Coast via the Energy Transfer Crude Oil Pipeline (ETCOP). Without DAPL, the Upper Midwest market could be short by an average 180 Mb/d beginning in mid-2022, especially after the Capline reversal enters service. This is all assuming that ETCOP does not flow while DAPL is offline. Should ETCOP flow crude out of Patoka during this time, the surrounding market would be even shorter. To make up for this shortage, Upper Midwest refiners would need several partial solutions. One of those being increased flows on Platte pipeline, which can increase flows by slightly more than 50 Mb/d out of Guernsey before hitting capacity constraints. Flows out of Cushing on Ozark could similarly increase by 50 Mb/d. Additionally, Western Canadian pipeline capacity is expected to be unconstrained by the end of 2021 as Enbridge’s Line 3 Replacement and Southern Access Expansion enter service. However, BTU Analytics models minimal production growth out of Western Canada, meaning that competition for Canadian barrels in Patoka would likely increase.
While the results of DAPL’s environmental impact statement could be released later this year, a permanent shutdown of the pipeline would be far-reaching. The implications of a DAPL shutdown extend even further beyond these two markets, including how Guernsey would be able to absorb the influx of flows from the Bakken and whether exports at Houston would be negatively impacted with ETCOP potentially not flowing.
To further explore the potential impacts of a shutdown, or to see BTU Analytics’ modeled oil flows through the rest of North America, inquire about a subscription to our monthly Oil Market Outlook report.