E&P Positioning Report: New Pipelines to Disrupt Supply Stack

August 23rd, 2016 |

Finding and drilling the best rock is only half the battle in the E&P business.  Moving product from wellhead to demand market and the costs associated with that transportation dictate whether your shale play is a market changer or just a field of dreams.  At various times in history, the addition of a single pipe to a market has fundamentally changed price differentials, and with it, the US supply stack for crude oil and natural gas.  Rockies Express did it for gas out of the Rockies.  Seaway did it for landlocked crude.  What new pipes will shake things up as we look forward over the next five years and how will that change the rankings of shale plays and the producers within those shale plays?

This is the fourth installment in our series of topics covered in our E&P Positioning Report.  See the first three blogs in the series that cover the topics of Acreage Quality, Lowest Cost Producers and Growth Potential to get up to speed.

Most industry watchers are aware of basins with good economics but bad transportation situations.  The Northeast in the gas world. The Williston Basin on the crude side.  All of Canada.

But new projects are on the way to affect changes in these regions.  Let’s focus specifically on the Williston Basin and the impact of the Dakota Access Pipeline, which is set to come online later this year.

The Bakken is the birthplace of the US crude oil boom that tipped the global balance.  The pace of supply growth was aided by the growth in crude by rail, which allowed supply to grow beyond the ceiling of pipeline takeaway and local refining capacity, as seen in the chart below.

Bakken Crude Pipeline and Rail Takeaway Capacity

The cost of rail transport including transfers meant that producers realized between $7 and $12/bbl discounts to the price that their crude was sold for in US coastal markets.  Prior to changes in regulations allowing for crude oil exports, the spread between Brent and WTI was considerably higher, which offset the cost of rail. This meant that Bakken netbacks were fairly competitive with other growing sources of US crude supply in the Gulf Coast and Midcontinent.  But the fall in the price of crude has hit the Williston producers disproportionately hard as a deduct of ~$10/bbl is much more painful than when crude is $40/bbl.

Energy Transfer’s Dakota Access Pipeline is set to come online later this year, and producers are guiding for lower differentials going forward.  The graphic below comes from our E&P Positioning Report, and shows where crude differentials were by basin in 2Q’2016 as compared to BTU Analytics’ forecast for differentials for 2Q’2018.  Both the Williston and DJ Basin are expected to see major improvements in differentials as a result of new pipeline capacity.  Note that the full report includes three years of quarterly crude oil and natural gas differential forecasts by basin, which take into account new projects as well as our production forecasts.

Bakken and Competing Shale Play Differentials

Falling differentials in the Bakken will have the effect of making the core of the basin more competitive with other major oil plays including the Permian and Eagle Ford.  Based on 2015 well results, it could mean that an additional 15% of wells drilled in the Bakken breakeven at $50/Bbl WTI as compared to 2Q’16 differentials, as shown in the chart below.  Despite all of the recent interest in the Permian and STACK, it’s much too early to write off the Bakken’s role in the North American picture going forward.

Bakken Economics Comparison

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Author: Kathryn Downey Miller

Kathryn Downey Miller is President of BTU Analytics where she leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the industry. Additionally, Kathryn oversees strategic planning, financial budgeting and analyst development for the company. Prior to founding BTU Analytics, Kathryn built market expertise in a diverse set of prior industry roles, including buyside investment research at an energy focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for E&P companies and investment banking at Citigroup. She speaks frequently at industry events on North American energy markets and is a CFA charterholder.