Fitch Ratings has published its “Bakken Shale Report.” The report provides an analysis of themes in the Bakken shale play, including crude market dynamics and the potential for new pipelines out of the region.
Bakken oil production has been sustained above 1 million barrels (bbl) per day since March and now accounts for 13% of domestic oil production. As regional gathering and takeaway infrastructure is relatively undeveloped, the primary challenge for upstream companies has been to balance gains from increasing production and drilling efficiencies with strained takeaway capacity.
While pipeline investment has been slowed by a lack of firm commitments from producers, announcements this summer by Energy Transfer Partners LP, Enterprise Products Partners LP, and Enbridge Energy Partners LP to develop new pipelines to source Bakken supplies signal an increased emphasis on pipeline development.
The large ramp-up in production has disrupted traditional PADDII supply and demand relationships. Bakken crude has averaged $10/bbl below WTI in 2014, with producers utilizing rail and semi-truck to get barrels to market. Rail is estimated to provide 60% of regional takeaway capacity, and costs to ship by rail affect spread levels. The cost to rail production to East and West Coast refiners is estimated at $10/bbl to $15/bbl, compared to pipeline costs to the Midwest of $2/bbl to $5/bbl. Until significant new pipeline capacity comes into play in 2016, producers will continue to utilize significant rail capacity to place their crude in the most economic markets.
From a credit perspective, Bakken exposure is viewed as favorable, especially as it forms a portion of a diversified upstream portfolio. Volumes in the basin should continue to grow, as Bakken producers are enjoying strong margins on production in the current oil price environment. Fitch expects that the pipeline industry will develop additional takeaway solutions, maintaining longer-term Bakken economics relative to other oily basins. However, a sustained downside oil case could erode economics for pure-play operators lacking pipeline takeaway.
Fitch expects impact on master limited partnership (MLP) credit ratings to be neutral given increasing value for pipeline capacity from growing Bakken production and anticipated firm contractual support from shippers. Current project sponsors have significant scale of operations, geographic and asset diversity, and experience in building and financing large-scale projects. However, delays in construction due to environmental and safety concerns, fluctuating steel costs, and a higher interest rate environment could potentially limit profitability.