The Dakota Access Pipeline doesn’t make economic sense anymore

With the decline in worldwide oil prices, production in North Dakota’s Bakken oil fields has declined so much that, by the end of this year, the controversial Dakota Access Pipeline will be completely unnecessary from an economic point of view.

In addition to maintaining this blog, I also work for the State of California’s oil spill response agency.  I serve as a tribal liaison, incident responder, and economist to calculate damages from spills.  I have a Ph.D. in resource economics.  And I’m good with Excel.

bakken-well-lifeSo here’s the deal.  Bakken oil wells are extremely short-lived.  Over the life of a well, they produce 46% of their output in the first year, and 2/3rds of their production by the end of their second year.  By the time they are five years old, their production is only 10% of what it once was.  Their production “decline curves” are very predictable.  With wells that die so fast, the only way to maintain production is to keep drilling more wells.  And that’s what they’ve done.  North Dakota is now pock-marked with over 10,000 oil wells, most drilled between 2013 and early 2015.

bakken-wells-drilled

The decline in new wells has mirrored the decline in the price of oil.

Since then, the price of oil has collapsed from $104 per barrel (for West Texas Intermediate) in July 2014 to $30 per barrel in February 2016.  As I write, it sits at $46.  The break even point to make it worth it to drill a new well in the Bakken oil fields varies from $45 to $65 per barrel.  Below that, it’s not worth it to get the oil out of the ground.  So people have stopped drilling new wells.

The original impetus for the Dakota Access Pipeline was to move oil from North Dakota to Illinois, where it could be shipped further to refineries and markets on the Gulf Coast and East Coast.  Without it, industry argued, the oil is either stuck in North Dakota, or has to be moved by train, which is twice as expensive.  Also, fracking in North Dakota and West Texas have so over-produced oil that they have crashed the world price.  We have no coordinated national policy– it’s a free market free-for-all, so over-production happens. Moving oil by rail was attractive recently because: 1) it was the only option since there were hardly any pipelines connected to North Dakota; and 2) it’s faster and more flexible than pipeline, so sellers could make up the higher cost by finding the best market to ship to.

bakken-well

A typical Bakken oil well drill pad in North Dakota.

Neither one of these things are true anymore. Pipeline capacity has increased and, more importantly, Bakken oil production has decreased so that, by the end of 2016, all Bakken production will fit comfortably inside the current pipelines (and a couple small refineries).

Here’s the math.  First, the “take-away” capacity of pipelines and refineries in North Dakota:

  • Pipelines to Wyoming (Butte, Butte Expansion, Kinder-Morgan Double H) can take 368,000 barrels per day (bpd). From there it is shipped by rail to California or by pipeline to places like Cushing, Oklahoma (the “Grand Central Station” of oil in the US).
  • Pipeline to Minnesota (Enbridge Mainline North Dakota) can take 214,000 bpd.  From there it goes to Superior, Wisconsin, another oil transport hub.
  • Pipelines to Canada (Enbridge Bakken Expansion and Plains Bakken North) can take 185,000 bpd to Manitoba, from where it may go anywhere, even China.  (This has been the loophole that allows the US to export crude oil.)

All this totals to 767,000 bpd.  Add in two small refineries (Tesoro Mandan and Dakota Prairie), which can together handle another 88,000 bpd, and there is a total capacity to handle about 850,000 bpd of Bakken production.  Any production above and beyond this must be shipped by rail.

Just a few years ago, Bakken oil production had been predicted to rise to 1,500,000 bpd, or even higher.  There were plans for multiple new pipelines to handle this:  Dakota Access, Enbridge Sandpiper, Dakota Express, and an “on-ramp” to the Keystone Pipeline hauling tar sands down from Canada.  All of these have been cancelled, except for Dakota Access (which will have a large capacity of around 500,000 bpd).

bakken-prediction-graph

This chart was created in 2013, showing the black line of predicted Bakken oil production and the gray area of future planned pipelines to carry that oil.  I’ve annotated this graph with actual production (in red, which goes out into the future as predicted production) and actual current pipeline and refinery capacity (the dotted white line).  The Dakota Access Pipeline will be unnecessary by the end of the year.

With knowledge of the number of wells and the age of the wells, Bakken production is easy to predict.  Given the short lives of these wells, and the lack of new wells, we can expect bakken-2jpgBakken production to fall below 850,000 bpd by the end of 2016, and probably below 700 bpd by the end of 2017.  The latest available figures, from August, show that production was around 920,000 bpd and falling.  More importantly, the average age of a well was over two years old and only 51 new wells were completed that month.  Production is falling and will continue to fall as long as the price of gas stays low.  With production in West Texas exploding even more than in the Bakken (and without the transport headaches of North Dakota), we can expect the worldwide price to stay low.  Furthermore, worldwide demand continues to stay flat or slightly decline as people shift to alternative energy.

So why is Energy Transfer Partners spending nearly $4 billion building this pipeline? Primarily because they managed to secure long-term contracts from buyers and sellers to use the pipeline.  By delivering the oil to Illinois, it offers more market choices than the existing pipelines (although price differences between markets are small).  Ultimately, however, there are four things we can glean from this:

  1. There is no trade-off between the Dakota Access Pipeline and crude-by-rail.  Rail transport is unnecessary to move Bakken oil.
  2. The Dakota Access Pipeline does not generate more jobs or increased energy independence.  It merely steals market share from other pre-existing pipelines, takes their jobs and profits, and results in no more oil production or transport than if it did not exist.
  3. From an oil production standpoint, the Dakota Access Pipeline is merely a luxury, another transport option.  It is not necessary for capacity reasons.  It is merely a business venture for one particular set of investors to steal market share from other pipelines.
  4. Obviously, investors know all this stuff.  That’s why they pulled out of the other large pipeline proposals.  Even without the issues at Standing Rock, this pipeline is a risky investment.

war-zone-3

Here are more recent posts on Standing Rock and the Dakota Access Pipeline:

Standing Rock map tells a story

war-zone-map-zoom

Time for pressure: What you can do for Standing Rock now

Here are my previous posts, which focus more on the history and current status of the conflict on the ground:

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