Crude Oil Price Drop: Pipes Related to Expensive Oil Production Take a Hit

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Researched by Industrial Info Resources (Sugar Land, Texas)--While many analysts are worried about the high cost of production in the Bakken and other shale plays, where extraction costs are higher than traditional wells, there are other sources that are being hit. Enhanced oil recovery (EOR), a process which injects carbon dioxide (CO2) into older wells to extract the remaining oil reserves, has seen a drop in producer demand for takeaway infrastructure.

Likewise, another expensive source of oil, the Alberta Oil Sands, has seen project cancellations and an industry trend toward expansion of existing assets and away from building new ones. Unlike other areas of production, such as the U.S. shale plays in the Permian Basin, Eagle Ford and Bakken shales, EOR and the oil sands have had their associated pipeline infrastructure projects heavily impacted, delayed or even canceled.

While 99% of the pipelines in the U.S. carry oil or gas, a portion of the remaining 1% carries CO2, which is normally transported to the EOR production well via pipeline. Two big areas for EOR wells are the Permian Basin and the mature oil fields of southern Mississippi and western Louisiana. While EOR activities that are based on existing pipeline infrastructure continue apace, CO2 suppliers, such as Denbury Resources (NYSE:DNR) (Plano, Texas), have delayed indefinitely planned expansions to their CO2 pipeline assets in Louisiana.

Similarly, Kinder Morgan CO2, a branch of Kinder Morgan Incorporated (NYSE:KMI) (Houston, Texas), has withdrawn applications to the Bureau of Land Management (BLM) for planned expansions to its Los Lobos CO2 system in New Mexico. Kinder Morgan also has put on ice the build-out of the St. Johns system in New Mexico and Arizona, citing falling oil prices affecting producer interest. The declining interest gels well with the falling oil prices, as the initial cost of building EOR infrastructure would present a significant risk for producers, who might be better served by waiting for prices to return to more profitable levels.

While shale extraction is more expensive than conventional wells, the extraction and break-even price for shale oil is significantly lower than more technology-intensive methods, such as EOR or the steam-assisted gravity drainage (SAGD) used in Alberta. While SAGD facilities can be billion-dollar projects, on par with some offshore platforms, their daily production rates are far smaller, meaning production costs more per barrel. As such, with fewer planned new SAGD facilities in the near future, the need for pipeline takeaway drops proportionately. Being so close to their source, these pipelines are among the few in the midstream business to face indefinite delays or cancelations at the hands of the oil price drop.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.