Bakken's Rapid Ascent

Stretching across portions of the U.S. and Canada, the vast Bakken shale play has been one of the principal success stories in the unconventional game. Set within the Williston Basin, this play stretches across some 200,000 square miles and holds potential of 3.65 billion barrels (bbl.) of undiscovered continuous oil reserves and an estimated 1.85 trillion cubic feet (Tcf) of primarily oil-associated natural gas.

The Bakken is one of the oilier shale plays and continues to impress skeptics. As 2011 production numbers are finalized, the Bakken region follows Texas, Alaska and California for top year-end reported numbers. Yet, at the end of December, North Dakota reported 535,000 bbl. per day, nudging out California's 531,000 bbl. per day. That separation will increase in 2012.

By yearend 2012, North Dakota will firmly hold the number 2 spot for onshore crude oil production in the Lower 48. For perspective, North Dakota ranked number 7 in overall crude Lower 48 oil production in 2007. Regional crude oil volumes have ramped up significantly during the past three years, with 2009 and 2010 average volumes of 218,000 bbl. per day and 310,000 bbl. per day, respectively. Average daily volumes in 2011 accelerated that ascent, doubling 2009 volumes to almost 419,000 bbl. per day.

And, the story continues as significant rail and pipeline infrastructure construction efforts move ahead to be prepared to methodically manage ongoing area growth.

Gathering systems

Interestingly, most of the crude oil gathered in the Williston Basin region continues to be gathered by truck. To date, because of truck use, there has been less historical permanent impact to regional land resources. Also, having trucking infrastructure as an integral part of the gathering mix has supported the historic and ongoing aggregation and storage capability for crude oil and natural gas liquids (NGL) at central locations in the largely unpopulated state.

This concept has been very supportive of the development of centralized area service centers as well as anchoring regional locations for drilling logistics and rail terminals. These facilities are highlighted on the regional map associated with this article. Traditional truck gathering will continue to be an integral part of the regional gathering mix, but reduced truck traffic is a must, providing a positive regional benefit.

Recently, increasing production scale appears to be facilitating the increasing necessity of a number of area-specific crude-gathering pipelines. With a number of export pipelines developing at, or building connecting facilities into the area's mini-hubs, future crude oil logistics and services options will be sustainable.

Plains Pipeline LP, through a number of asset acquisitions, has become one of the area's active crude gatherers, most recently acquiring assets from Nexen USA in late 2010. Its Trenton gathering system is one of the regions larger facilities.

Bridger Pipeline operates the existing Poplar gathering system (42,000 bbl. per day) as well as the Parshall gathering system, which gathers crude in Mountrail County and delivers it to Stanley, North Dakota. Bridger Pipeline's most recent addition is the new 105,000 bbl. per day Four Bears crude-gathering system, which is operational in central McKenzie and Dunn counties.

Elsewhere, Quintana's Bakkenlink Pipeline will gather up to 65,000 bbl. per day of crude from Billings, Dunn, McKenzie, Stark and Williams counties into a rail terminal and possibly into future pipeline facilities exiting Fryburg, North Dakota.

Enbridge has also offered to build a minimum of 67,000 bbl. per day of gathering connectivity via a proposed Sanish Pipeline. This capacity would link to its existing system and its proposed expansions.

As crude oil volumes have increased, the midstream infrastructure used to dispose of daily volumes is in constant flux. With most Bakken area crude pipelines currently full and regional operators anxiously awaiting future enhancements and additions, companies have utilized developing rail terminals as an effective means to export their crude.

Railway take-away

Ironically, with downstream pipeline bottlenecks existing at the Cushing, Oklahoma, trading hub, crude-by-rail transportation has proven to be an even more valuable tool as Bakken operators have been able to route their cargos into other non-constrained markets. These crude-by-rail markets include alternative markets in Louisiana, California and Washington, in addition to accessing the constrained, traditional markets at the Gulf Coast and the U.S. Midwest.

In many instances, with what appears to be an ongoing pricing discount for West Texas Intermediate at the Cushing hub due to aggregated supply excess and constrained take-away pipelines, crude-by-rail transportation from the Bakken directly to other crude markets—after accounting for the rail transportation cost—has also yielded better netback pricing for operators.

Year-end 2011 data indicates that, in the midst of continuing daily volume increases, crude oil quantities moving by rail doubled in the latter half of 2011, increasing from 64,000 bbl. per day to 123,000 bbl. per day. For comparison purposes, this increase is proximate to one 100-plus-car unit train per day, assuming 600 bbl. per car.

BSNF Railway Co. advises that its 2009 regional connectivity and capacity—primarily manifest-type scheduling—was 242,168 bbl. per day. Of course, not all of this capability was utilized. BSNF has evaluated its overall area commitments and capabilities and, with operations migrating toward future use of unit trains, has doubled such to 534,884 bbl. per day for 2011.

By 2015, BSNF expects more than 80% of its crude oil operations can be via unit train. This capability has assured Bakken operators that they can continue to develop and produce without significant infrastructure constraint as has been a major issue at the Cushing hub.

Major pipelines

With ongoing uncertainty regarding the proposed Trans Canada Keystone XL Pipeline, other crude oil pipeline projects continue to be offered. Several pipelines have conducted recent open-seasons to determine remaining interest in future pipeline projects.

Saddle Butte Pipeline, via subsidiary High Prairie Pipeline, is offering a new 150,000 bbl. per day pipeline to Clearbrook, Minnesota for markets in the Midwest and Northwest.

Enbridge has also offered a similar but larger project, the Sandpiper Pipeline, which would provide up to 350,000 bbl. per day from the Bakken area to other pipeline connections at Superior, Wisconsin.

These routes effectively parallel the existing Enbridge North Dakota system enroute to crude hubs in the Midwest. Plains All American Pipeline LP has also announced it is seeking interest in a potential project complimentary to its existing Rocky Mountain transportation assets, offering delivery service from Baker, Montana, to Billings, Montana, or from Baker to Casper, Wyoming, where existing Plains' pipeline systems would route crude to existing Rockies regional markets. Initial volumes would be in the range of 50,000 bbl. per day.

Positioning for the long term with commitments to crude oil pipelines and purchase or lease of rail-tank cars, Bakken operators appear to have adopted an integrated strategy which will assure sufficient transportation infrastructure to support their continuing crude development efforts.

One of the largest projects announced for the Bakken is a 200,000 bbl. per day crude oil pipeline that will move light sweet crude to Cushing, Oklahoma. Oneok Partners LP announced plans to spend between $1.5 and $1.8 billion to build the 1,300-mile line.

Recent project announcements indicate that the future crude oil infrastructure environment for the Bakken is still a work-in-progress. A table provided by the North Dakota Pipeline Authority shows what a maximum infrastructure buildout could consist of, assuming all currently announced projects were to be implemented. It also highlights the complementary nature, flexibility and reliability of having two long-term, mutually-exclusive transportation service options.

Refinery demand

On the oil demand side, preliminary construction has begun on a 15,000 bbl. per day refinery on the Fort Berthold Indian reservation, which is the first new refinery construction in the region in decades. Three affiliated tribes (Mandan, Hidatsa and the Arikara Nation) expect completion in 2013.

Tesoro Corp. is implementing a 10,000 bbl. per day expansion at its existing Mandan, North Dakota, refinery, to be completed by fourth-quarter 2012.

Another proposed refinery would be built by Dakota Oil Processing LLC near Trenton, North Dakota. The design is for 20,000 bbl. per day with a focus on diesel product output.

And, in February 2012, a joint venture consisting of MDU Resources and Calumet Specialty Products proposes to build a 20,000 bbl. per day diesel refinery in southwestern North Dakota, targeting markets in the state's industrial and agricultural sector.

Collectively, these refining additions provide an assured local market benefit for developing crude resources.

Gas flaring solutions

While challenges are being met on the crude oil side, the flaring of natural gas associated with the oil production has been a frequent discussion item, primarily because of its rarity in the U.S. and the fact that a portion of the regional resource base isn't able to reach a market.

North Dakota regulators have generally granted a one-year waiver that allows gas to be flared if reasonable market access is not attainable. But, at expiration, operators must re-apply and justify any continuation.

Area operators have implemented numerous onsite facilities to maximize Btu-value capture, routing gas to processing plants when possible or installing local refrigeration units and onsite storage to capture NGLs available in the gas stream prior to flaring. This strategy means that significant quantities of propane, butane and natural gasoline are recovered and are sent to regional markets via truck or rail.

Another efficient utilization of gas is when it is used as onsite fuel during drilling operations. In early 2011, North Dakota's oil and gas division advised that more than 130 million cubic feet (MMcf) per day was being flared in the region. By midyear, data analysis indicated that, even though the total volumes being flared had increased, operators were capturing 92% of the overall energy value of the actual volumes produced while capturing 95% of the commercial value of the Btus available. Ironically, a lower overall U.S. gas price path favored this methodology.

Regional operators will further reduce flaring as additional processing facilities come on-line in 2012. Gas-gathering systems into Oneok's 100 MMcf per day Garden Creek processing plant have recently been completed and its centralized processing and liquids handling services are said to have darkened flares at 250 nearby locations.

Further increasing the Btu-value capture strategy, gas residue from the plant is now entering into Williston Basin Interstate Pipeline. Processed NGLs from the plant are managed by truck and rail, but the ability to capture optimum NGL value awaits the implementation of the new Oneok Bakken NGL Pipeline lateral facilities and downstream pipeline and fractionation capability in first-quarter 2013. However, limited additional regional processing capability is available in 2012, so operators will have to continue current Btu-value capture strategies.

Gas pipelines

Two major pipeline systems are operating to take away natural gas from the Bakken play. The Alliance Pipeline System is an interstate gas pipeline that begins in Canada and traverses the Bakken area. It is a hydrocarbon-rich gas pipeline system and does not accept dry gas volumes.

Alliance USA, which has a capacity of 1.5 Bcf per day, currently is receiving about 80 MMcf per day of rich gas from Bakken area sources via the Prairie Rose Pipeline System.

Area operators expect Alliance to receive up to an additional 120 MMcf per day of hydrocarbon-rich gas when a future connecting lateral comes online near Hess' Tioga, North Dakota, processing plant in July, 2013.

Elsewhere, Northern Border Pipe Line (NBPL) and Williston Basin Interstate Pipeline (WBIP) are currently able to receive dry gas volumes and route such to available markets. WBIP serves local markets in the region but can also deliver gas into NBPL.

These pipelines typically connect to processing plant outlets and complete the Btu-energy recovery chain by providing markets for dry, plant-residue volumes. Collectively, these two systems potentially have available capacity of up to 2 Bcf per day of dry natural gas receipts, but a major portion of the Northern Border capacity may, alternatively, be sourced from Canada.