In anticipation of starting interstate service on May 14, the Dakota Access Pipeline (DAPL) filed tariff rates with FERC to transport crude from various origin points in the Williston to Patoka, IL or Nederland, TX. The 470 Mb/d of initial capacity provided by the pipeline is enough to move almost all of the remaining rail volumes out of the region, all else equal, and is expected to tighten regional differentials and improve Bakken netbacks for some producers due to tariff rates that are as low as $5.50/bbl to Nederland.
Historically, as much as 800 Mb/d of crude moved via rail out of the Williston and was economic due to Brent/WTI spreads between $5 - $15/bbl before oil prices collapsed at the end of 2014.
Rail provided a great opportunity to capture wide spreads due to infrastructure bottlenecks out of the Bakken and provided access to the East and West coast markets which lacked the pipelines to capitalize on the shale boom happening in the center of the country. However, rail also is more expensive and when prices and differentials collapsed, the inability to shift from rail to pipelines hurt many Bakken producers as they continued to suffer wider differentials as compared to other regions. In 4Q 2016 there was still roughly 389 Mb/d of crude moving out of the Bakken via rail with most volumes delivered to the East and West coasts that remain captive to either waterborne imports or domestic supplies via rail.
The completion of DAPL is expected to change the rail and pipeline dynamics in the Bakken. Committed rates to Nederland are as low as $5.50/bbl and uncommitted rates are $7.50/bbl. These rates are competitive with not only existing pipeline routes to go from the Bakken to the Gulf Coast, but also with the average rail rates out of the region which range from $7.46/bbl to $11.08/bbl, exclusive of transloading and tank car fees. Comparing Bakken netbacks for rail compared to DAPL shows that the best netback to a coastal demand market is on DAPL, and rail routes to Washington are competitive at the margin.
As a result, when DAPL begins full service in May, we expect most of the remaining rail volumes to shift from rail to pipeline. BTU Analytics estimates that wellhead differentials are averaging -$6.74/bbl in April compared to -$7.41 in 4Q 2016 and will continue to tighten.
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