Bakken Reverts to Crude-by-Rail, Steep Discounts if DAPL Shuts

In the coming week, a D.C. District judge is expected to rule on whether to vacate the easement for Energy Transfer’s Dakota Access Pipeline and could further decide if the pipeline will be shutdown while a new court-ordered environmental impact statement (EIS) is conducted by the Army Corps of Engineers. The court mandated EIS will be more in depth than the previous assessment completed by the corps, creating uncertainty as to the length of the shutdown. A planned expansion to increase DAPL capacity to 750,000 b/d by adding new pumping stations, would also face delay from the expected start-up in mid to late 2021.

It is unclear at this point if the Trump Administration executive order of June 4th to expedite approvals for energy projects by waiving environmental regulations like the 1969 National Environmental Policy Act (NEPA) for economic emergency purposes will have any impact the current court case and decision. At the very least, the order will likely ignite further court challenges and create uncertainty for producers and midstream operators.

Since its start in 2017, DAPL has been the main conduit for transporting Bakken crude from North Dakota to Midwest refineries, and also to the USGC via its connection to the ETCOP in Patoka, Illinois. Most rail volumes from the Bakken have gone to refining markets on the East and West Coasts in the past. However, examining the likely flows if DAPL is shut while a new EIS is conducted, indicates there is limited room for growth in demand from these markets. Washington state has imposed restrictions on the amount of crude delivered by rail (CBR) in the state, and the East Coast has limited room for import growth. More Bakken crude would then likely be shipped by rail to the Gulf Coast with export markets in mind.

The chart below illustrates actual CBR volumes from January 2014 and the estimated call on rail if DAPL is shut down starting in August. The call on rail is based on our current production forecast for Bakken crude through 2021 and assumes other pipelines from the basin ramp up to full utilization while DAPL is shut. The steep drop in the call on rail from May through July is due to the contraction in production as a result of low prices in response to Covid-19. A dragged-out EIS process or further court challenges keeping DAPL offline would likely result in the call on rail rising above 600,000 b/d in 2021, and a return of very steep discounts on Bakken crude.

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