The twisted economics of the Dakota Access Pipeline

It’s not about energy independence or even climate change. It’s all about profit.

 

As the weather gets colder, the fight over the Dakota Access Pipeline is heating up, in rather ugly ways. Just days before Thanksgiving, law enforcement officers tried to blast the protesters away with water cannons in 25-degree weather and employed other “less than lethal,” though still harmful, dispersal methods. One protester may lose her arm as a result of injuries suffered during the violence. And to top it off, the Army Corps of Engineers plans to close one of the camps of "water protectors" next week, which may embolden law enforcement to take a more forceful approach. 

High Country News has reported what’s at stake for the Standing Rock Sioux tribal members and their allies trying to stop or re-route the project: Tribal sovereignty, water, environmental justice, holy lands, treaty-rights and antiquities. Add to that the prospect of more carbon spewing into the atmosphere, and one can see why activists are risking so much to stand in the pipeline’s way.

Less clear is what the $3.78 billion, 1,172-mile-long crude oil pipeline offers in return if and when construction is completed and it goes into operation. Energy Transfer Partners, the project’s main proponent, says that the pipeline will offer jobs, economic relief to a struggling region and, by spurring production of North Dakota Crude, it will take the U.S. closer to the lofty ideal of energy independence.

Construction on the pipeline is about 85 percent complete and it has, indeed, put people to work. Yet it is not clear how many new jobs have been created since the jobs are spread out over 1,000 miles. Rural towns along the pipeline’s corridor have reported a boost in hotel and campground occupancy rates as the contractors move through. That, in turn, generates sales and lodging tax revenues for the local governments. The boost, however, won't last. In a few months, when (and if) construction is complete, the workers and their spending money will depart. The finished pipeline will require just 40 permanent maintenance and operational jobs along its entire stretch. 

Once oil is flowing, property tax revenues — an estimated total of $55 million annually — will kick in. While it’s a big chunk of change, the impacts will be diffused, shared by four states. North and South Dakota are expected to receive about $13 million each, divided between several counties, a drop in the budget bucket (Colorado generates nearly $20 million per month from taxes and fees on marijuana). That said, it might be enough to buy the county sheriffs some more military gear from the Pentagon in order to squelch the next pipeline protest. It will not, however, cover the costs of such squelching: The current law enforcement effort has reportedly cost $15 million so far.

The fact is, pipelines, like transmission lines, don't have a major economic impact except when they’re built. They otherwise go mostly unnoticed until they spill, burst or explode.

The Dakota Access Pipeline being installed between farms, as seen from New Salem, North Dakota.

The bigger-picture impact, whether on climate change or energy independence, is more difficult to suss out. Both proponents and opponents seem to be working on the “build-it-and-they’ll-fill-it” premise. That is, if you expand pipeline capacity for North Dakota crude, it will encourage more oil drilling and thus more oil production. If more domestic oil is produced, the logic goes, then we have less need to import foreign oil and we achieve greater energy independence. The flip side to that is, the more oil we drill, the more we consume, resulting in greater carbon emissions. It's summed up in this nifty formula:

• More Pipeline Capacity —> More Oil Production —> More Energy Independence and Carbon Emissions

This formula, however, holds only if lack of pipeline capacity is a major hindrance to oil development. It's not. We can move crude oil not only through pipelines, but also with trucks, trains and tankers. Oil’s mobility (along with its relative fungibility) help make it a global commodity in a way that natural gas, for example, is not. The lack of pipeline capacity is not a major limiting factor in oil development and production; when the North Dakota boom was on, no one opted out of drilling because of lack of transportation options. In fact, prices were so high, no one opted out of drilling at all.

Just as the biggest driver of oil development is a high oil price, the biggest hindrance, particularly for expensive-to-drill North Dakota crude, is a low oil price. That relationship has been on display in North Dakota, and across the West, for the last decade: Oil prices went up, thanks to burgeoning demand in China and the developing world, so drilling intensified and production went bananas. Oil prices crashed as China's economic growth slowed, the drill rigs were stored away and production has decreased.

Very few wells have been “shut-in” or plugged up. Most of the already-drilled wells continue to produce, but at lower and lower rates, a phenomenon known as the “decline curve.” Wells that produced 220 barrels per day when they were drilled in 2005, for example, now only produce about 20 barrels per day.

Plug these critical factors -- global supply vs. demand and price --  into the aforementioned formula and the outcome becomes far murkier. No longer does more pipeline capacity directly lead to more production; it must first either raise the price of oil, or induce demand. The latter's not going to happen. A pipeline across the upper Midwest will not inspire the masses in China to buy cars and drive them all over the country. It will not affect global demand.

So how about price? The Dakota Access Pipeline is expected to carry half-a-million barrels of oil per day to refineries and market hubs in Illinois. Moving a barrel of oil on the pipeline is expected to cost about $8, compared to approximately $15 for shipping it via rail. That is, if the producer would have received $34 per barrel for rail-shipped oil, it will get $41 per barrel for Dakota Access Pipeline-shipped oil.

This $7-per-barrel bonus could add up to hundreds of thousands of dollars in additional revenue for the producer over the well’s life, and could certainly keep wells from being shut-in. Yet it's doubtful that it's enough to push the producer to dust off the rigs and start drilling again. It costs anywhere from $5 million to $15 million to drill a well in North Dakota's Bakken formation. After the last bust, producers and their investors are unlikely to fork out that kind of cash until oil prices go up considerably and stay there, which will only happen if Saudi Arabia commits to a long-term slash in its production. Unless new wells are drilled in North Dakota at a furious rate, production will continue to decrease, thanks to the decline curve.

There is one other way the pipeline could impact oil prices, at least for the oil flowing through the line. Some oil customers reportedly entered into contracts with producers prior to construction to buy DAPL oil at or near 2014 prices. If those contracts remain in place despite the protest-caused construction delay, it could, theoretically, push producers to drill a few more wells to produce enough oil to fetch the higher price. But probably not. It's more likely that those producers will simply divert oil now shipped by rail to the pipeline, thus increasing profit without increasing production.

If, somehow, the pipeline were able to increase oil production, then we'd still have another variable to plug into our equation. I'll call it the T. Greg Merrion factor, for the New Mexico oil executive who told me about it: “Nothing helps low prices like low prices, and nothing hurts high prices like high prices.” That is, the increased supply delivered by the pipeline (without a consequent increase in demand) would increase the amount of oil supply on a market where demand can’t keep up with supply. The glut grows. Prices slide further downward. There's even less drilling. Production slides. The cycle continues.

• The Dakota Access Pipeline, on its own, is not likely to result in increased production of North Dakota Crude, because More Pipeline Capacity ≠ More Demand;

• Therefore the pipeline will not create more oilfield jobs or result in higher severance tax revenues to North Dakota;

• If there is any uptick in production thanks to the pipeline, it won't be enough to put a dent in the 5.2 million barrels of oil the U.S. continues to import each and every day;

Since the pipeline won't push more production, it also will not result in more consumption. Therefore, it will not directly lead to a significant increase in carbon emissions.

Which is to say, the pipeline will be neither the economic boon, nor the climate bane, it's been made out to be. Nor will it get the U.S. any closer to energy independence.

Why, then, is Energy Transfer Partners so intent on building this thing? The equation that answers that one is far simpler. If the pipeline indeed carries 470,000 barrels per day, at a rate of $8 per barrel, the company should gross about $1.37 billion per year. Operating costs are low (remember, there are just 40 employees running this thing), so it shouldn’t take long to recoup the capital costs. That leaves a lot for the investors, like Energy Transfer Partners' billionaire CEO Kelcy Warren, or reputed billionaire and President-elect Donald Trump.

Yes, Trump is invested in the companies behind the pipeline, though the amount of his stake decreased substantially between 2015 and 2016. Meanwhile, Warren donated more than $100,000 to Trump’s campaign, clearly hoping he would remove federal obstacles to the pipeline.

These numbers are worth considering when you see the images of the “water protectors” getting pummeled with water cannons, rubber bullets and tear gas. They’re not being attacked in the name of jobs, the economy or energy independence. They’re being attacked in the name of profit.

Pat Bagley/The Salt Lake Tribune via caglecartoons.com

Jonathan Thompson is a contributing editor at High Country News. He is currently writing a book about the Gold King Mine disaster

Tim Farnham
Tim Farnham
Nov 30, 2016 10:00 AM
Jonathan,
Excellent article about all the factors surrounding the DAPL. I love how thorough HCN articles are and this is no exception. One comment on your assumption that more pipeline export capacity from the Bakken will not equate to increased production. One of the reasons drilling in the Bakken has declined so much in this recent oil price crash is because the Williston Basin has been export constrained since the boom started. That is, more oil is produced than exists export capacity to get it out of the basin. This creates a situation where the price for oil received by producers in the Williston Basin is less than the price benchmark (West Texas Intermediate, or WTI). The price differential fluctuates for a variety of reasons but is roughly around $10/bbl (+/- a few $) less than WTI. Increasing export capacity from the basin, as the DAPL will do, will have the impact of reducing the price differential, which will effectively raise the price of oil for producers in the basin, which should cause an increase in drilling and thus production; more areas of the Bakken will become economic with a reduced price differential. In addition increased export capacity should make the price differential less volatile allowing for better financial planning by oil and gas operators.
Cheers, Tim Farnham
David Hoza
David Hoza
Nov 30, 2016 07:21 PM
Excellent article. I'm curious why journalists rarely if ever mention the apparent fact that in a global market, greater access generally seems to equate to greater oil (and other fossil fuels) moving globally, and providing profits to corporations involved, rather than simply providing US oil independence. Or is this not the case?
Steve Snyder
Steve Snyder Subscriber
Dec 02, 2016 12:18 PM
Obama better yet, he could have decided never to do that in the first place. I just love when wars get started by neoconservatives, then get neoliberalized for money.

==

Tim: Per this piece and others, that price differential elimination is not enough to greatly increase Bakken production until worldwide supply, and demand, both adjust. (On the supply side, that's not likely to see big changes for at least two full years.
Dean Kurath
Dean Kurath Subscriber
Dec 02, 2016 03:53 PM
Thanks for a good article. I appreciate your comments that the pipeline will have little bearing on how much oil gets consumed. Also your observation that the pipeline is not the economic boom nor the bane its been made out to be. Personally, I think the protesters would be better off spending their considerable energy trying to ween us off of fossil fuels but good luck with that. I agree with Tim that the pipeline will save money and could reasonably lead to more drilling, albeit maybe not that much.

I don't think I buy your argument that it was slowing growth in China and the developing world that led to the crash in prices. Per and IEA chart I found, demand has been increasing rather steadily since at least 2013. Rather it was increased supply (in part due to shale oil, but also increased OPEC production) that caused prices to collapse. This may change next year (quote from IAE Oil Market report, Nov 10, 2016). "If the OPEC countries do implement their Algiers resolution the resultant production cut will see the market move from surplus to deficit very quickly in 2017, albeit with a considerable stock overhang that will take time to deplete." Well OPEC did agree to a production cut but it seems unlikely they will stick to it. If they do, perhaps the pipeline will have more an impact than it appears at this time.

While profit probably has some role in what is going on it seems that this has crossed into an ideological battle with both sides adhering to their respective delusions.

At some point I hope see an article that explains why the protesters waited until the pipeline was 85% done (and billions spent) to get energized over the issue. This seems way, way to late in the process.
Steve Snyder
Steve Snyder Subscriber
Dec 02, 2016 04:11 PM
Actually, re China, Dean, the IEA, in the very piece you mentioned, says this about China:
"Oil demand growth is forecast to ease to 1.2 mb/d in 2016, having peaked at a five-year high of 1.8 mb/d in 2015, due to slowdowns in the OECD Americas and China. A similarly paced expansion is foreseen in 2017. ...
"With a surprise fall in Indian demand reported for September, the Indian growth story appears to have lost some of its lustre. As with China, demand growth not only stuttered but also removed one of the key previous supports to global demand. ...
"Chinese crude stocks built by a strong 29.7 mb in September and 84.4 mb over 3Q16, up by a cumulative 328 mb over the past 12-month period."
https://www.iea.org/[…]/

(I've seen charts elsewhere that point to post-2013 slowing demand growth in China.)
Steve Snyder
Steve Snyder Subscriber
Dec 02, 2016 04:12 PM
Dean, here, via IEA data, Bloomberg says Chinese oil demand has peaked:
https://www.bloomberg.com/g[…]-think-about-demand-instead
Mark Rozman
Mark Rozman
Dec 02, 2016 05:37 PM
Was it Obama whose administration signed off on the first 85% of the pipeline ? This is similar to the post-election protests, stupid. Is this just the "cause de jour" ? Yep. How many reservations and pueblos drill on their own property ? Would all of these protesters be crying if the oil originated on tribal land ? Try some critical thinking and dig down to the root issues, or not. How about the other hundreds of pipelines ? Are pipelines safer than the other transportation alternatives ? Yes. Stay and freeze your biscuits off or go home, it won't matter either way. If you despise oil, then don't use plastic, drive a vehicle, use natural gas heat or myriad other uses that benefit society. Happy hunting.
Steve Snyder
Steve Snyder Subscriber
Dec 02, 2016 06:38 PM
Mark, since you like oil that much, you OK if we run a pipeline somewhere near your backyard, or next to your grandma's tombstone?
Mark Rozman
Mark Rozman
Dec 02, 2016 06:58 PM
Bring it.
Steve Snyder
Steve Snyder Subscriber
Dec 02, 2016 07:18 PM
I don't believe you, Mark. And, if you are for real, in my opinion, that's a pretty shallow view of life, family heritage and moe.
Steve Shook
Steve Shook
Dec 06, 2016 12:44 PM
It might be good to note that the woman who might lose her arm was the victim of an explosive device set by protestors.
Mark Rozman
Mark Rozman
Dec 06, 2016 12:59 PM
Noted. I heard it was a self-inflicted injury. Bad either way. Steve Snyder, do you live in a unabomber cabin with no oil by-product products of any sort ? I didn't think so. Anyways, rerouting the pipeline is a good thing. Environmental reviews are good, also, except when they are abused for the sake of delays. Is your Grandmother's final resting place in jeopardy ? Don't start this holier-than-thou B.S. with me, doesn't fly. Leave your emotions in the classroom, where they belong. Happy hunting and happy drilling !! U.S. ENERGY INDEPENDENCE !!!
Steve Snyder
Steve Snyder Subscriber
Dec 06, 2016 01:29 PM
Zero-sum, all-or-nothing answers, or 'answers," aren't real answers. Don't start your "gotcha" with me, doesn't fly.

You want energy independence? More solar, more wind, more conservation.
Steve Snyder
Steve Snyder Subscriber
Dec 06, 2016 01:33 PM
Other Steve: Any proof of that claim? 1. Police won't release a detailed list of all the "devices" they're using. https://www.theguardian.com[…]line-sophia-wilansky-injury
Steve Snyder
Steve Snyder Subscriber
Dec 06, 2016 01:34 PM
Other Steve: 2. Lest you say "but the Guardian" or whatever, some conservative websites reject your claim, or at least strongly question it, too: http://patriotpowerednews.com/[…]/
Steve Snyder
Steve Snyder Subscriber
Dec 06, 2016 01:36 PM
Other Steve: 3. Eyewitness accounts of law enforcement using concussion grenades: http://heavy.com/[…]/
Mark Rozman
Mark Rozman
Dec 06, 2016 01:39 PM
HAHAHAHAHAHAHA. Just like other "eyewitness accounts" !!! Time for a new tinfoil hat.
Steve Snyder
Steve Snyder Subscriber
Dec 06, 2016 01:56 PM
Mark, I'd borrow yours, but you're surely too attached to it. ;)
Jim Bolen
Jim Bolen Subscriber
Dec 14, 2016 09:32 AM
we already have turn the page with energy independence . We have achieved or are close to being a net exporter of energy. So why produce more oil when it is cheap. Let the Arabs sell their oil while it is cheap.
I don't understand Trump's urgency to ramp up more fossil fuels extraction. The only thing I can see is that this does is give massive short term profits to the oil producers and pipeline people at the expense of what is good for America. The new incoming administration of Trump appears it will take short term solutions over long term sustainability