Hart Energy’s North American Shale Quarterly (NASQ) provides subscribers with a 360-degree view of the top North American shale oil and gas plays in quarterly reports, which include maps with company acreage overlays, production forecasts to 2030, play economics and other information. Midstream Business with this issue begins periodic summaries of recent NASQ data reports, including these highlights on the Bakken shale play.

The Bakken/Three Forks play is posting the most significant crude oil supply growth on the continent. The production has so-outpaced traditional fixed pipeline-capacity expansions that, as of September 2012, 51% of North Dakota Bakken crude oil transportation occurred via rail, according to the latest data available from state authorities.

Rather than reaching only fixed hubs and terminals along the national crude oil pipeline infrastructure, such as the upper Midwest and the Cushing hub in Oklahoma, crude by rail shipments can reach alternative markets coast-to-coast, from the refining centers of Washington and California to those in Texas and Louisiana, and even those on the East Coast. By riding the rails, oil barrels can reach higher-valued markets faster and with less longterm commitment than waiting for fixed pipeline assets to be built to serve the same destinations.

Crude pipelines

The accompanying table lists selected, recently announced crude oil projects serving the Bakken play. The main developments in fourth-quarter 2012 regarding existing crude infrastructure involve the utilization of the 10,000 barrel (bbl.) per day expansion at Tesoro Corp.’s Mandan, North Dakota, refinery, now capable of processing 68,000 bbl. per day of Bakken crude. Two other stories involve existing crude-by-rail infrastructure are: A $425 million cash buyout of Rangeland Energy LP by Inergy Midstream Partners and Inergy LP, which entailed a connecting crude pipeline and a crude-by-rail terminal in the Bakken, and another purchase of a Bakken crude-by-rail loading terminal by Plains All American Pipeline LP.

Additional news flow involves a number of proposed infrastructure projects.

Firstly, ONEOK Partners LP cited insufficient shipper commitments for long-term crude takeaway from the Bakken play into the Cushing hub during the recentlyconcluded open season for the proposed 200,000 bbl. per day Bakken Crude Express pipeline. The pipeline operator therefore announced a cancellation of the project, a development which may give pause to future midstream operators and investors seeking to develop new pipelines heading into the already-glutted and bottlenecked hub.

But other operators continue to advance a series of projects to increase the oil takeaway capacity from the Williston basin to multiple major markets in North America.

First up, we add into our pipeline watch list a potential project that is only recently being openly discussed by its developers, Energy Transfer Equity LP and Energy Transfer Partners LP. Energy Transfer is apparently far enough along in this conceptual pipeline project to begin making public disclosures at analyst conferences. If the project comes to pass, their Trunkline Pipeline—a multilooped natural gas pipeline long in service to carry gas from the producing Gulf Coast region into the Upper Midwest consuming regions—will be in for a considerable makeover.

Energy Transfer Equity, the parent company of the Trunkline pipeline operating subsidiary, applied to the Federal Energy Regulatory Commission (FERC) in September 2012 to take two underutilized segments spanning 770 miles out of gas service to enable them to be reversed and converted to carry crude oil southward.

Management discussed the plan during the company’s November 2012 analyst day and disclosed that the potential project could cost $1.5 billion to provide southbound crude oil takeaway capacity between 400,000 bbl. per day and 600,000 bbl. per day from Tuscola, Illinois, to Gulf Coast refining markets in Lake Charles, Louisiana, and Nederland, Texas. If FERC grants approval by the second quarter of 2013, as expected by management, the pipeline reversal could be constructed and placed into service by July 2014.

The looped facilities that Energy Transfer seeks to reverse and convert to oil service consist of two segments: a 45-mile segment of 24-inch pipe running from Buna, Texas, to the Longville 4 Compressor Station in Louisiana, and 725 miles of 30-inch pipe from the Longville Compressor Station to the Tuscola Compressor Station in Illinois. Following the proposed abandonment, the Trunkline’s certificated, winter mainline capacity will be reduced from 1.555 million dekatherms per day to 958,000 dekatherms per day. Energy Transfer’s application with the FERC notes that, after conversion of the looped sections, the Trunkline’s remaining 36-inch natural gas mainline will stay in northbound service with sufficient capacity to cover all of Trunkline’s contracted capacity of 953,000 dekatherms per day.

That is the good news. The other news, as always, involves the enviro-political machinations involving the TransCanada Corp.’s Keystone XL project.

Keystone XL

As if it needs to be recalled, the Keystone XL is a major project that was expected to begin construction in 2013 but was rejected by President Obama’s administration, which had rights of approval since the proposed pipeline would cross the U.S. border. TransCanada submitted an alternate route in 2012, and then announced in September 2012 that it submitted a Supplemental Environmental Report (SER) to the Nebraska Department of Environmental Quality (NDEQ) for the preferred alternative route for the Keystone XL Pipeline in Nebraska. Nebraska regulators approved the new route in January.

Nebraska’s governor approved the project in January, now the federal State Department (and the new Secretary of State during President Obama’s second term) will preside over the federal environmental review of the new route.

Prior statements by Secretary of State Hillary Clinton’s department have indicated that State will constrain its new environmental review only to the rerouted Nebraska pipeline portion. There is no legal requirement to do so, however, according to members of the Congressional Research Service with whom Hart Energy Research has contacted.

Further, whoever is appointed the next Secretary of State may choose to put his or her own stamp on the overall Keystone XL environmental review and process going forward. Calendar year 2013 will be the fifth consecutive year of environmental review for the northern portion of the Keystone XL project under the State Department process. Accordingly, we believe there is an equal chance that the process for a favorable approval of the border-crossing Keystone XL pipeline may stretch into a sixth or more year of review.

Meanwhile, work on the southern Gulf Coast pipeline project, the portion from Cushing to the Texas Gulf Coast, got under way in earnest during the fourth quarter of 2012. Such work was greeted by numerous impromptu protests by anti-pipeline activists, including one which resulted in former actress Darryl Hannah being arrested in Winnsboro, Texas. In another act of resistance, a Nacogdoches- area landowner who granted TransCanada an easement for the construction of the pipeline obtained a two-week stop-work restraining order from a judge after filing suit against TransCanada because the pipeline will carry not only “crude oil” but also “bitumen.” Presuming construction continues to completion, TransCanada’s $2.3 billion Gulf Coast project is planned to be in service in mid-to late-2013.

Looking to expand the market for Bakken crude eastward, Enbridge Corp. and Enbridge Energy Partners announced in early December 2012 a $6.2 billion slate of projects to enhance light-oil access into the Midwest and the eastern coastal refining markets in both Canada and the U.S., with selected projects noted in the accompanying table of crude oil projects. Therein, we also detail developments by other oil pipeline operators, including Hiland Partners, Plains All American Pipeline, True Co’s, Bear Tracker Energy and SM Energy, who are also investing in the play to increase the takeaway capacities.

Refineries

Preliminary construction has begun on a 15,000 bbl. perday refinery on the Fort Berthold Indian reservation near New Town, North Dakota, to be called Thunder Butte Petroleum Services. Three affiliated tribes—Mandan, Hidatsa and the Arikara Nation––expect the completion of the refinery in 2013 or 2014.

Gas and gas liquids

The Bakken/Three Forks play is the nation’s pre-eminent unconventional crude oil producing region. Yet the region also boasts significant production of natural gas and natural gas liquids (NGLs). What’s more, as noted for several consecutive months by Lynn Helms, director of the North Dakota Industrial Commission Department of Mineral Resources, the rate of increase in daily natural gas production in the state––which was 794 million cubic feet (MMcf) per day in September––is outpacing the increase in the state’s oil production, which averaged 728,494 bbl. per day in September.

“Daily natural gas production continues to increase slightly faster than oil production. This indicates that gas-oil ratios are increasing and confirms the need for more gathering and processing capacity,” Helms wrote in November.

There are numerous gas processing plants, refrigeration and storage units in the region to capture the liquids content. The overall flaring of gas continues, but will reduce as more processing plants become available. Most of the NGLs extracted in the processing plants are transported by truck or rail to outside markets. See the adjoining table of selected gas and NGL projects.

Midstream companies and partnerships are continuously investing to transport the increasing production of NGLs in the region. Of note in the third quarter of 2012, a green light by FERC enabled Alliance Pipeline to move ahead with construction preparations for its Tioga Lateral Pipeline project in North Dakota. FERC issued its approval for Alliance’s 79.3-mile, 12-inch diameter lateral pipeline to connect new gas production from the Williston basin to the Alliance mainline in North Dakota. The gas will then be shipped onward to the Chicago market hub.

The planned in-service timing for the new pipeline is summer 2013. The pipeline has been certificated for 106.5 MMcf per day and is underpinned by a contract with Hess Corp. for transport of 61.5 MMcf per day. The pipeline is expandable, based on shipper demand, and with the project now a go, Alliance will continue talks with interested parties. Shipment of construction materials to approved locations along the pipeline route has begun and construction crews will soon be mobilized.

In the third quarter of 2012, ONEOK Partners LP announced an open season for its previously disclosed Bakken NGL Pipeline. The 600-mile pipeline will transport unfractionated NGLs from the Bakken shale in the Williston basin to an interconnection with the partnership’s 50%- owned Overland Pass Pipeline in northern Colorado. The Bakken NGL Pipeline is currently under construction and is expected to be in service during the first quarter of 2013. Additionally, the partnership announced plans in July 2012 to expand the pipeline’s capacity by installing additional pump stations. This expansion is expected to be completed in the third quarter of 2014.

The Vantage Pipeline project is the proposed ethane pipeline that has received Canada’s National Energy Board approval in 2012 and is expected to completion in 2013, with all regulatory approvals in place. The new pipeline will transport ethane from Hess’s Tioga plant via a proposed pipeline to Alberta.

Rail and truck

Rising production volumes from Bakken and other inland areas of North America seek an outlet at the higher-priced coastal markets where waterborne crudes, either produced in North America or imported into this region, receive higher prices. Because of either the dearth of pipeline projects to the East and West Coast refining markets, or because of the time lag of pipeline construction to the Gulf Coast, Bakken producers have turned to rail, truck and even barge to ship crude to higher-valued coastal markets.

In the fourth quarter of 2012, interests and ownerships of several established crude-by-rail terminals have changed hands, going from start-up entrepreneurs into established midstream operators.

Inergy LP and Inergy Midstream LP purchased Rangeland Energy LLC for $425 million to obtain sole ownership of the COLT terminal and pipeline connector at Epping, North Dakota. The COLT terminal operates 120,000 bbl. per day of capacity, all of which is contracted, and has room to expand by up to 80,000 bbl. per day. That asset and that deal fit the profile of a growthoriented master limited partnership making a purchase of a toll-taking asset with upside.

Another growth-oriented MLP, Plains All American Pipeline (PAA) announced last December the $500 million purchase of five U.S. crude-by-rail terminals, sweetened by a long-term service agreement with the former owner/operator/developer, U.S. Development Group. Two of the terminals are receiving points along the West Coast at Bakersfield, California, (under development) and the Gulf Coast at St. James, Louisiana, (fully operational). These destination terminals round out PAA’s East Coast crude-by-rail operation at Yorktown, Virginia. The other three acquired terminals include send-out terminals in the Bakken, the Niobrara and the Eagle Ford shale oil-rich producing regions.

Global Partners LP announced an estimated $80 million purchase of a 60% interest in Basin Transload LLC whose operations include the new Zap terminal for tanker trucks and a crude-by-rail loading in Columbus, North Dakota, serving the Albany, New York, area on the Canadian Pacific Railway, and another loading terminal at Beulah, North Dakota, serving the Gulf and West Coasts along the BNSF Railway.

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