On 4 December, the US Army delivered the news that it would not grant an easement to approach Lake Oahe on the Missouri River to the developers of the $3.8 billion Dakota Access pipeline, and with it, a blow that could see the project become a stranded asset before it reaches completion. 

Derailed by protest

The 1,882km crude oil pipeline was originally proposed by Energy Transfer Partners (ETP) and Phillips 66 in 2014. The pipeline begins near Stanley, North Dakota and end at Patoka, Illinois, crossing through South Dakota and Iowa along the way. As of November, the pipeline was 84% complete.

The project came under public scrutiny when it was discovered that part of its route skirted near sacred burial grounds for the Standing Rock Sioux tribe. Strong responses by law enforcement and the National Guard brought increased negative attention to the situation, drawing movie stars, famous musicians and environmental protectors from around the world.

At the heart of the protest was the Standing Rock Sioux claim that the project would endanger the tribe’s only natural water source, and those fears were given credence when it came to light that the pipeline was originally set to cross waters upstream of Bismark, North Dakota. That route had been denied, since it would potentially endanger those waters. With international attention turned onto the project, the outgoing Obama administration stepped in and ensured that the easement would not be granted.

The developers – Energy Transfer Partners (ETP), Sunoco Logistics Partners and Phillips 66 – locked in the majority of its shipping agreements with its nine offtakers in late 2014 during a favorable oil price environment, with those commitments hinging on a commitment to ship oil by 1 January 2017. By mid-2016, the pipeline had contracted 90% of capacity for up to 10 years.

After the easement was initially granted for the project in July, details on the project financing came to light with co-lead arrangers including Citibank, Mizuho, MUFG and Toronto-Dominion (TD) Bank. In November, however, Norwegian DNB Bank – who is among the 17 financial backers signed onto the financing – said that it was reviewing its position and may decide to pull out for philosophical reasons.

Superfluous capacity

The Institute for Energy Economics and Financial Analysis and the Sightline Institute noted that the pipeline’s 570,000 barrel per day capacity may be largely “superfluous by mid-2017” if the downtrend in Bakken production continues in a report they jointly released in November. 

The report asserted that “the Bakken already has ample takeaway capacity for the oil it produces”, and that “the region’s oil transport infrastructure is already overbuilt, with some 60% of its capacity currently unutilised.”

“Together with local oil refineries,” the report said, “the region’s existing pipelines and oil-by-rail facilities … can handle nearly 2.5 million barrels of Bakken crude throughput per day.” 

According a 17 October report from the US Energy Information Administration, Bakken companies are producing fewer than 950,000 barrels of oil per day. Roughly 250,000 barrels of oil per day were shipped out of the Bakken as of March 2016, with about 100,000 of those barrels being delivered to the Pacific Northwest through take-or-pay contracts. That leaves about 150,000 barrels per day that could be shipped via the Dakota Access pipeline instead of by rail. With that in mind, one of the developers’ most vocal arguments in favor of the project – that it will help mitigate the need for transport of Bakken oil by rail – loses much of its steam. 

Waning demand

In an August court filing, a declaration by ETP senior vice-president of engineering Joey Mahmoud said that “the long-term transportation contracts give shippers a right to terminate their commitments if DAPL is not in full service per the contract deadline”, and that “a loss of shippers to the project could effectively result in project cancellation.” The company subsequently denounced delays associated with the Obama administration’s scrutiny of the project in September, seeking court intervention.

Whiting Petroleum, Continental Resource and Hess – three of the largest active companies in the Bakken region – have had credit downgrades within the last year by Standard & Poor’s and Moody’s, which were skeptical of the companies’ high levels of debt. What’s more, revenues for the three producers were down between 60% and 70% for the first nine months of 2016 from the same period in 2014.

With that in mind, it is more than likely that shippers would be keen to renegotiate the terms of their commitments for Dakota Access capacity, and that – more than the potential need to settle on a second alternative route – could be fatal.

ETP did not respond to a request for comment regarding the shipping contracts and potential future of the Dakota Access project. The company is also developing the $3.7 billion Rover pipeline in the eastern US, the Bayou Bridge pipeline in Louisiana, and two pipelines in Mexico.

*(Image of the Dakota Pipeline in New Salem, North Dakota courtesy of Tony Webster)