Ain't That a Shame - More Niobrara Pipeline Capacity, But Growth Prospects Are Dicey

Despite slowdowns in drilling, completions and crude oil production in the Niobrara Shale region in northeastern Colorado and eastern Wyoming, new pipeline takeaway capacity out of the tight oil play is being built, apparently due to the expectations of some that the Niobrara will bounce back more quickly than most other basins if and when crude prices rise –– and stay –– above $55-60/bbl. Later this year, the 340 Mb/d Saddlehorn/Grand Mesa Pipeline to the crude storage and distribution hub in Cushing, OK is expected to begin operation, supplementing Pony Express and White Cliffs, which already move crude from the Bakken and the Niobrara’s Denver-Julesburg and Powder River basins, and giving Niobrara producers more than enough takeaway capacity for the foreseeable future. Today, we look at the possibility of an infrastructure over-build in the eastern Rockies.

We first described growing producer interest in the Niobrara Shale more than three years ago in Bananarama in the Rockies. Back then, some talked up the Niobrara –– and particularly its Denver-Julesburg (DJ) area in northeastern Colorado –– as “the next big thing” (maybe even another Bakken). Crude oil production in the Niobrara did increase rapidly during the 2010-15 period, from just over 100 Mb/d to about 450 Mb/d at its peak last year (2015). Most of the gains came in the DJ, but Powder River Basin (PRB) production grew as well. Midstream companies responded to the actual and projected growth in Niobrara production by planning –– and building –– several crude-by-rail facilities and pipelines to help move the increasing volumes of oil coming out of the DJ and the PRB to market, mostly to the storage and distribution hub in Cushing, OK (see Hey Mr. DJ, Keep Playin’ That Song). Just last month (June 2016), in This ‘Pony’ Knows More Than One Trick, we discussed the 320 Mb/d Pony Express Pipeline, which starts in Guernsey, WY (the heart of the PRB) and runs through the DJ to Cushing. Pony Express began operating in late 2014, mostly carrying Bakken oil delivered to Guernsey via the Bridger/Belle Fourche gathering system and the Double H Pipeline. In April 2015, the new, 66-mile Northeast Colorado Lateral (NECL) allowed up to 90 Mb/d of DJ-sourced crude to flow into Pony Express near Sterling, CO, and in February 2016 the new, 135-mile Powder River Express pipeline allowed up to 45 Mb/d of PRB oil to flow into Pony Express at Guernsey (WY). The other major conduit for Niobrara crude deliveries to Cushing is the seven-year-old White Cliffs Pipeline, which originates in Platteville, CO; its co-owners recently completed a 65-Mb/d expansion (actually, a parallel pipeline) that boosted White Cliffs’ capacity to 215 Mb/d.

While the NECL and Powder River Express pipelines proceeded and the White Cliffs expansion was built, other major takeaway projects were set back by the 2014-15 collapse in oil prices (and the expected effect of lower prices on Niobrara production). For example, Enterprise Product Partners’ proposed 340-Mb/d Bakken-to-Cushing Pipeline (which would have picked up some PRB crude along the way) was cancelled in December 2014 due to lack of shipper support. Also, Spectra Energy put on hold plans for a 400-Mb/d pipeline that would run from Guernsey (WY) to refineries and storage in Patoka, IL. Two other proposed out-of-the-Niobrara pipelines to Cushing remained alive though: the 200-Mb/d Saddlehorn Pipeline (a 40-40-20 joint venture of Magellan Midstream Partners, Plains All American and Anadarko Petroleum) and the 220-Mb/d Grand Mesa Pipeline (100%-owned by NGL Energy Partners) –– see Go DJ –– Will Niobrara Crude Production Keep Up With Takeaway Capacity?, which was posted in October 2015. A few weeks later (in November 2015), the developers of the Saddlehorn and Grand Mesa projects decided to combine them into a single project: a 20-inch-diameter, undivided joint interest, 340-Mb/d pipeline in which Saddlehorn’s co-owners (Magellan, Plains and Anadarko) will own 190 Mb/d of capacity and Grand Mesa’s owner (NGL Energy Partners) will own 150 Mb/d. (Saddlehorn’s co-owners have the option of expanding the maximum capacity of the pipeline to more than 450 Mb/d in the future at their sole discretion and cost, and they would own all the incremental capacity from any expansion.) Now under construction, Saddlehorn/Grand Mesa Pipeline –– no clever hybrid name like Saddlemesa or Grandhorn, thank goodness –– will run from Lucerne, CO, to Cushing (red dotted line in Figure 1); Saddlehorn’s co-owners will own origin points within the DJ at Carr and Platteville, CO (blue dots), as well as a new Carr-to-Lucerne pipeline (blue dotted line), and NGL Energy Partners will own DJ origin points at Lucerne and Riverside and a new pipeline between the two (green dotted line). The main pipeline from Platteville to Cushing is expected to be operational in September (2016), with the other, shorter sections north of Platteville to come online by the end of the year.

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