ONEOK Partners Shelves Proposed Bakken Crude Express Pipeline

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--In a surprise move, ONEOK Partners LP (NYSE:OKS) (Tulsa, Oklahoma) late last month decided not to proceed with a planned 1,300-mile Bakken Crude Express Pipeline, which would have transported up to 200,000 barrels per day of crude oil from the Bakken formation in North Dakota and Montana to the crude-oil hub in Cushing, Oklahoma. Construction was scheduled to begin in early 2014 and completed in mid-2015, but the $1.8 billion project was shelved after ONEOK was unable to obtain enough firm shipping commitments from crude-oil producers.

"Despite the robust outlook for crude-oil supply growth in the Williston Basin in the Bakken Shale, we did not receive sufficient long-term commitments under the terms we needed to construct the Bakken Crude Express Pipeline," Terry K. Spencer, president of ONEOK Partners, said in a statement issued November 27. ONEOK Partners is a subsidiary of ONEOK Incorporated (NYSE: OKE) (Tulsa, Oklahoma).

The decision follows a 60-day "open season" where potential shippers would have the opportunity to negotiate long-term contracts in return for priority transportation service. The open season ended November 21.

"While we are disappointed with the results of the open season, we remain committed to serving Williston Basin producers for their natural gas, natural gas liquids and crude-oil infrastructure needs," Spencer continued. "We still believe the Bakken Crude Express has a competitive advantage over other competing projects due to its proximity to the route of our Bakken NGL [natural gas liquid] Pipeline currently under construction and other ONEOK Partners natural gas liquids pipeline corridors."

The announcement came as a bit of a surprise to some industry observers. Crude-oil production in the Bakken formation has risen rapidly to about 750,000 barrels per day, a 25% increase over late 2011 levels. Industry experts predict production will reach 1 million barrels per day sometime in the next three to five years. For more on that issue, see November 2, 2012, article - Crude Oil Production in Bakken Formation Shows No Sign of Slowing.

Indeed, one of the biggest problems facing crude-oil producers in the Bakken has been a lack of out-bound pipeline capacity. Most of the outbound pipelines from the Bakken bring the oil to the crude-oil hub in Cushing, Oklahoma, where a longstanding bottleneck has imposed occasionally significant price penalties on producers. For more on that, see April 17, 2012, article - Crude Oil Glut at Cushing May Worsen as New Production Outstrips New Outbound Pipeline Capacity.

Solving the logistical riddle--how to get the crude out of the Bakken without getting it stuck in Cushing--has led to hefty capital investments by pipeline companies, railroads, trucking firms, storage companies and barge operators, all seeking to win new business. For more on that issue, see November 5, 2012, article - Rail vs. Barge: Which Can Get Bakken Crude to Refiners Faster and Cheaper?

An "abundance" of outbound railroad capacity probably made the project unviable, according to a research note from Tudor Pickering Holt & Company, as reported by Bloomberg. Some of this rail capacity allowed producers to ship their product to the East Coast, where it displaced more expensive imported oil that was priced against Brent, the main international oil benchmark.

"I believe in the adage, 'A rising tide lifts all boats,' and crude-oil production continues to rise in the Bakken, but it looks like not all boats are being lifted up equally," commented Jesus Davis, Industrial Info's vice president of global research for the oil & gas industry.

Even after shelving the Bakken Express project, Spencer, the ONEOK Partners president, told investors the firm still has "$4.2 billion to $4.8 billion of announced natural gas and natural gas liquids projects under way, many of which are in the Bakken Shale. Additionally, the partnership has a $2 billion-plus backlog of unannounced growth projects."

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