February 19, 2016
Getting Real About Oil Prices and Impacts on Oil Pipelines
Bakken shale oil and Canadian oil production is falling, and pipeline companies are now biting the bullet and deferring projects.
Here’s an update on oil prices, Bakken shale oil, Canadian tar sands, and the impacts on oil pipelines in the Midwest. Markets matter.
Today, the Nymex market price for West Texas Intermediate (WTI) crude oil is $29.57/bbl. That’s low, and many analysts believe that WTI oil prices will stay below $50 bbl, or go even lower, during the next two years.
Bakken Shale Oil – Fewer Rigs, Less Production, Weakened by Today’s Market Prices: North Dakota’s Bakken shale oil’s break-even prices are WTI $45-$50/bbl for the most efficient producers and WTI $50-$60/bbl for the rest of the producers. That depends on how rich the well is, how costly and efficient the company’s construction and operations are, and how close the rig is to infrastructure. Then, the Bakken shale oil must be transported by pipeline or rail to distant refineries in the Midwest or Texas.
The number of drilling rigs now operating in North Dakota is the lowest since July 2009, and, as production ends at some existing rigs, the rig count will likely decline further. According to the North Dakota Department of Mineral Resources, Bakken output fell to 1.15 million barrels a day in December, down 2.5 percent from the previous month and 6 percent below the all-time high in December 2014. Department of Mineral Resources Director Lynn D. Helms stated that oil production could fall to 1 million barrels a day by the end of 2016. According to Helms, oil production and service companies are planning more layoffs in the first half of 2016, and there could be additional bankruptcies in June 2016 when banks often recalculate their debt limits for oil companies.
Unless and until WTI oil prices reach $50/bbl, the rig count and production will continue to decline in Western North Dakota’s Bakken shale oil region.
Canadian Oil Sands – New Production Not Economical with Today’s Market Prices: Canadian tar sands’ break-even prices for new production are around WTI $80/bbl for the “best of the best,” WTI $90-$100/bbl for the “rest of the best,” and WTI $100+/bbl for the “rest of the rest.” Canadian oil production will stagnate until WTI oil prices reach at least $80/bbl. Some current oil sands drilling and production operations have enormous sunk costs and will continue to operate as a long-term play as producers wait out what they hope will be higher prices in 2-3 years.
Less Oil Production Means Less Need for New Pipelines: Financing for new North American oil pipelines is drying up until bankers and other investors see WTI prices rise and thereby lead to more oil production. For example, Enbridge Energy Partners just announced that its Sandpiper Pipeline Project (running from Bakken shale in Western North Dakota through Grand Forks and Northern Minnesota to the oil refinery in Superior, Wisc.) and the Line 3 Replacement Program (running from Alberta through Eastern North Dakota and Minnesota to the oil refinery in Superior, Wisc.), which were originally scheduled for completion by 2017 and 2018, respectively, will both be held back as construction delays “cause a shift in the in-service dates to early 2019 and increase costs for the [Line 3 Replacement] and Sandpiper projects.”
That’s the market situation. As vehicle fuel efficiency (mpg) for North American cars and trucks continues to improve, that will reduce demand for gasoline, as will longer-term trends of Millennials driving less. We’ll see if low gas pump prices, on the other hand, continue and result in more vehicle miles travelled.
Please let me know if you have any questions or suggestions. Oil prices and markets have changed dramatically in the past 15 months, and the consequences for oil pipelines are significant.