Failure of Bakken Pipeline Projects Points to Tepid Gulf Coast Demand

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Researched by Industrial Info Resources (Sugar Land, Texas)--Since the start of its exploration, the Bakken shale has been lauded as a sort of Holy Grail for North American crude oil production. It has boasted reserves rivaling Saudi Arabia and inspired rapid growth in sparsely populated North Dakota. As such, the cry to get this crude oil to market has been loud.

However, in the past four years, three companies have proposed large pipelines to give Bakken crude oil better market access, and all three have failed. Lack of shipper interest has been cited for the failures. Despite the vast reserves in the Bakken shale, the crude it produces is light and sweet, something most American refiners are not equipped to handle. In addition, the same technology that is used to gain access to Bakken shale crude, also gives producers access to other reserves, which produce similar crude, but are closer to the refining hubs of the Gulf Coast.

Enterprise Products Partners (NYSE:EPD) (Houston, Texas) recently announced it is cancelling its Bakken-to-Cushing pipeline plans, citing a lack of shipper interest. In 2012, ONEOK Incorporated (NYSE:OKE) (Tulsa, Oklahoma) canceled similar plans to build a pipeline along the same route through Montana. Earlier this year, Koch Industries (Wichita, Kansas) also canceled its Dakota Express pipeline project, which would have carried Bakken crude to Illinois. While Koch was typically reticent on the motivations behind its action, it illustrates that the problem with Enterprise and ONEOK's proposals was not in their route, but in the common source of all three projects: the Bakken shale producers.

The oil produced in the Bakken is vastly different from that produced by OPEC countries, which is what Gulf Coast refiners are equipped to process. Bakken crude, like Eagle Ford shale crude, is light and sweet, bordering on condensate, while OPEC crude tends to be heavy and sour. While exporting condensate is a possibility, with the definition of "light crude" and "condensate" in flux, that option is complicated, and given its northerly location, the Bakken shale is nowhere near the Gulf Coast, where condensate can be shipped out of the country. Thus, it is more expensive to ship out Bakken crude than Eagle Ford, due to proximity. This explains why the three pipeline projects above met with insufficient demand; they were all going to ship oil south to the Gulf Coast, where there would be less demand and more competition from a better-priced rival, Eagle Ford crude.

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.