A few months back, we discussed the quandary that crude oil shippers face when deciding whether to commit to proposed new pipeline capacity out of the Bakken and the Niobrara, and from the Cushing, OK, hub to the Gulf Coast. The dilemma boils down to this: more capacity is needed, based on current constraints or projected growth (or both), but there’s some reluctance among shippers to make long-term commitments. Their worries are that production gains might slow and too much takeaway capacity might be built, resulting in bidding wars for barrels at the lease to fill shipper commitments. Well, in recent weeks there’s been a bit of a break in the project logjam; among other things, P66 and its partners have decided to proceed with the construction of both the Liberty Pipeline, from the Bakken and Niobrara to Cushing, and the Red Oak Pipeline, from Cushing to Houston and Corpus Christi via Wichita Falls, TX. And that’s not all. Today, we provide an update on efforts to develop new pipeline capacity from North Dakota and the Rockies to Oklahoma and beyond.
For most of the past two and a half years, crude oil production has been increasing in both the Bakken and the Niobrara, and output in those two important plays is now at or near highs. As you’d expect, a number of midstream companies have been reporting rising volumes on the pipelines that transport North Dakota and Rockies crude to points south and east — some also have been trying to advance proposals to develop new pipeline capacity. But as we discussed a few months ago in Commitment, Bakken and Niobrara shippers, while interested in the flow assurance provided by long-term contracts for capacity, have been wary to put their John Hancocks on the dotted lines. Why? For one thing, it’s particularly tough to assess how much incremental capacity might be needed along a pipeline corridor that picks up crude from a number of production areas along the way — in this case, crude from Western Canada, the Bakken, and the Niobrara’s Powder River Basin (PRB) and Denver-Julesburg (D-J) Basin — and delivers it to multiple destinations (the Midwest, the Midcontinent and the Gulf Coast). For another, there’s a palpable fear among shippers that they enter into, say, a 10-year deal to move 100 Mb/d of crude on Pipeline X from Point A to Point B, only to see production growth slow and a pipeline overbuild situation emerge. That could leave them in the undesirable position of having to bid up the prices they pay for crude to fill their pipeline commitments, squeezing their sales margins in the process.
That fear of commitment has had the effects of (1) slowing the development of new pipeline capacity out of the Bakken, Niobrara and Cushing, and (2) putting a few key pipelines close to full capacity. For example, Tallgrass Energy’s Pony Express Pipeline (PXP; aqua line in Figure 1) from Guernsey, WY, to Cushing has been close to full, but Tallgrass and Kinder Morgan so far have not pulled the trigger on their joint plan — announced in January 2019 — to add significant new takeaway capacity along the same general corridor. That plan would be based primarily on the repurposing of existing crude and gas pipes, including PXP, Kinder’s 84-Mb/d Double-H crude pipeline (dark purple line), and Kinder’s Wyoming Interstate Co. (WIC, orange line) and Cheyenne Plains (yellow line) gas pipelines between eastern Wyoming and south-central Kansas. The plan also calls for building about 200 miles of new pipeline (dashed dark-green line marked “New Pipe”) from the eastern end of Cheyenne Plains to Cushing. (Progress on the project could come soon — the latest extension of the project’s open season closed May 30.)