No sooner had we finished up our analysis of the divergent fates of two North Dakota crude oil pipeline projects - the Enbridge Sandpiper (going ahead after a successful second open season) and the Koch Dakota Express (cancelled in January) – then we learned that competitor Energy Transfer Partners (ETP) had launched a binding open season for a third pipeline proposal following basically the same route. The ETP press announcement provided few specifics but it seems remarkably similar to the cancelled Koch proposal. Today we look at plusses and minuses of this new pipeline proposal.
The first two proposals
Just a couple of weeks ago we reviewed the competing Enbridge Sandpiper and Koch Dakota Express pipeline projects that were both designed to increase takeaway capacity from Bakken production in North Dakota. In Episode 1 of that two part series we noted that the Sandpiper project moved forward in February of this year (2014) while the rival Dakota Express project hit the skids when its sponsor Koch Industries pulled the plug in January. Our analysis showed that neither pipeline was absolutely required to move Bakken production to market if you included rail-loading capacity in the takeaway equation – but noted that pipeline options are cheaper than rail and therefore can be more attractive to shippers, particularly when they offer flexibility to reach multiple markets. In Episode 2 we compared the routes and connections that the two rival pipeline projects offered Bakken producers and concluded that the Enbridge Sandpiper project was likely more successful in attracting shippers than Koch because of its greater flexibility of destinations.
Proposal number three
When yet another North Dakota pipeline proposal open season showed up at the start of March we wondered what such a project could offer Bakken shippers that they could not get from Sandpiper or the 20 odd rail loading terminals that compete with it? We start our understanding of the answer to that question with the project details provided so far.
In their announcement on March 7, 2014, ETP launched a binding open season to solicit shipper commitments for crude transportation service for Bakken production to multiple markets via two pipelines. The two pipelines will be operated by separate ETP subsidiaries. The first subsidiary is Dakota Access, LLC that proposes a pipeline from “point(s) of origin in the Bakken play in North Dakota to a terminus in Illinois”. The second subsidiary is Energy Transfer Crude Oil Company (ETCO) that proposes to provide transportation service through a pipeline “from point(s) of origin in the Midwest to the crude oil terminalling facilities of Sunoco Logistics Partners LP at Nederland, Texas, with various potential points of destination along the pipeline.” The capacity of the two proposed pipelines is to be determined by the level of shipper commitment during the open season. Shippers may commit to just the Dakota Access pipeline or to both Dakota Access and ETCO. Committed Shippers would have the flexibility of selecting a term of 5, 7, or 10 years, depending on destination point. The pipeline anticipated commencement of service date is 2016.
Although the publically released details of this new pipeline project are spartan as far as origin and destination go, it seems highly likely that the ETCO leg of the proposal – from the Midwest to Sunoco’s Nederland terminal on the Texas Gulf Coast at Port Arthur is none other than the existing ETP project now known as the Eastern Gulf Crude Access Pipeline (EGCAP – previously called the Trunkline reversal). We first described that project in June 2013 (see The Enbridge SAX and East Gulf Pipe Band) and then detailed how shippers on the cancelled Dakota Express would potentially have used EGCAP to get their crude to the Gulf Coast. Since EGCAP is currently expected to start at Patoka in Illinois and terminate at Nederland and will have a starting capacity of 420 Mb/d it seems unlikely that ETP would build another pipeline along the same route. So the ETCO leg is either going to be the same project as EGCAP or possibly an expansion.
Source: ETP Presentation and RBN Energy
The map above is from a recent ETP presentation and shows the currently planned route of the EGCAP project (expected to be completed in 2015 if permits are approved). We added a red dotted arrow on the map north of Patoka to represent the proposed incoming Dakota Access portion of the pipeline. We don’t have any details about that portion of the pipeline or the route it will take yet. We also put a solid green arrow on the map north of Patoka to show the planned Enbridge Southern Access Extension (SAX) pipeline that should be completed in 2015. SAX will link the Enbridge mainline system in Flanagan, IL to Patoka. According to Enbridge presentations, the SAX link will provide a route for up to 300 Mb/d of light crude oil carried from North Dakota via the Enbridge Mainline from Clearbrook, MN and Superior, WI (initially via the Enbridge North Dakota System, but after 2016 on Sandpiper) into the Patoka terminal. From Patoka that crude can be distributed via pipeline connections to several refineries in the Midwest. And although the Enbridge network continues past Flanagan through the Midwest to Cushing, OK and then via the Seaway pipeline to the Gulf Coast at Houston, the SAX route to Patoka and transfer to EGCAP will offer an alternate route for Enbridge North Dakota shippers to reach the Gulf Coast at Nederland, Port Arthur instead of Houston via Seaway.
The Dakota Access and ETCO (or EGCAP?) pipeline proposals appear to offer North Dakota producers a couple of advantages that they will not be able to get from the Enbridge system when (and if) the Sandpiper expansion is approved and built in 2016. The first is additional pipeline capacity out of North Dakota. As you can see from the stack chart below, that capacity is probably not needed until 2016. The chart shows historic (shaded light blue) and projected (shaded purple) North Dakota Bakken crude production. The red overlaid line represents existing and proposed pipeline takeaway capacity from North Dakota as well as local refinery consumption. You can see that existing production exceeds pipeline capacity until the Sandpiper and Keystone projects kick in during 2016. We also marked the Dakota Access pipeline at an assumed 200 Mb/d with a red dotted line – showing that the new proposed pipeline will only be absolutely needed by the end of 2016. The green overlaid line represents the additional takeaway capacity available via rail – indicating plenty of spare capacity for North Dakota shippers to choose rail options to get their crude to market if pipelines do not offer the routes or flexibility that they want.
Source: RBN Energy and North Dakota Pipeline Authority
The second advantage that Dakota Access shippers would get from the new ETP proposal is the choice of an alternative route to the Gulf Coast besides the Enbridge system. And it seems to us that choice is the biggest selling point for ETP. The Koch Dakota Express proposal offered a limited choice because shippers would need to transfer to Enbridge or EGCAP in the Midwest in order to get to the Gulf Coast. ETP is now offering a complete route from North Dakota to Nederland that will compete head to head with Enbridge – potentially keeping the lid on tariff terms and conditions as well as offering direct access to refineries to the East of Houston. We should mention of course that North Dakota shippers already have the choice of using the Bridger and True pipeline systems that take crude down through Montana to Guernsey, WY. Congestion on that route is likely to be remedied by the Tallgrass Pony Express pipeline expected online later this year (2014). However, this westbound pipeline route out of North Dakota is not direct to the Gulf Coast but travels via Cushing where shippers must transfer to Enbridge/Enterprise (Seaway) or TransCanada (Cushing Marketlink) pipelines.
Apart from offering Bakken shippers a choice besides Enbridge, ETP are likely also betting on pipelines being more attractive than the plentiful North Dakota rail capacity. That bet is perhaps founded not just on the lower cost of pipeline transport versus rail but also on shipper concerns about increased testing and tank car costs that have arisen this year as a result of the spate of crude by rail accidents.
Our understanding of the attraction of this new pipeline proposal is that it offers Bakken shippers an alternative direct path to the Gulf Coast that does not use the Enbridge system. To that end, crude producers will benefit from the flexibility. For ETP the Dakota Access leg of the new proposal will help to make the EGCAP leg from Patoka a success by attracting shippers away from the Enbridge system in North Dakota – a task that would be far harder to achieve in Patoka. Finally the outcome of this open season should provide an interesting indication of whether North Dakota producers prefer pipeline routes to the Gulf Coast over rail options to other markets like the East and West Coast in the long term.