The Bakken shale is the gift that keeps on giving.
Hiland Crude, a subsidiary of Hiland Partners, is proposing a new pipeline that would cost $300 million – transporting crude from North Dakota’s Bakken field to eastern Wyoming.
The pipeline is expected to have a starting capacity of 50,000 bpd, but it could hold twice that amount. The 12-inch pipeline will stretch 500 miles, and the company is in talks with various landowners and Converse County officials in Wyoming to get the project underway.
Hiland already signed deals with some landowners along the Converse County line, and the company is hopeful for more cooperation.
If all goes well with negotiations, construction will begin this summer. The pipeline is expected to foster 180 jobs throughout its construction and three to five permanent positions.
The pipeline, known as Double H, will be fully operational by August of 2014. Most of the sections will only take three to four months to construct.
Double H will begin in Dore, North Dakota, stretching to Guernsey, Wyoming. From there, the pipeline will connect to the Pony Express pipeline—formerly a natural gas line that is being transformed into a passage for crude by Tallgrass Energy Partners, Oklahoma's Enid News reports
Pony Express is being revamped to reach Cushing, Oklahoma—a city well known for its extensive oil trading and as the center for the settlement price for West Texas Intermediate on the New York Mercantile Exchange.
Getting the oil to Cushing is the company’s highest priority, since Cushing oil receives a higher price.
Hiland Crude Vice President Jim Suttle considers Guernsey a low point for Rocky Mountain Oil, trading for $26 below Cushing value, according to Enid News.
It is understandable why Hiland Crude would want to get the oil flowing beyond Guernsey, but Double H will not be enough to fully satisfy the growing demand for more pipeline networks.
The Bakken oil boom and the constantly-growing output is causing the need for more pipeline infrastructure, but this is easier said than done.
Trouble in Oil Paradise
The oil boom that is sweeping across America is surely something to get excited about, but there is the looming problem of lacking infrastructure. This stems from a variety of factors.
Even though Hiland has high hopes in negotiating with land owners to implement the pipeline, Converse County commissioners have heard some complaints from constituents about the pipeline. Although interstate pipelines are a vital part of any oil boom, many landowners and towns are not in favor of them—something that may play a role in delaying future pipeline projects.
Regardless of the obstacles, pipelines need to be in place, especially where there are high concentrations of oil production. Companies must be able to move the excess volumes of crude to maintain a continuous flow, and the only way to do that is through a strong pipeline system. Many oil companies are failing to get crude reserves to market in a timely manner.
This causes a backlog in oil production, forcing companies to sell crude below market value. Canadian companies have had to sell crude at a discount, which is why there is strong support for Enbridge’s (NYSE: EEP) Northern Gateway pipeline.
Without pipelines, the next best alternative is transportation through train.
But there are extensive costs involved when shipping oil by train, not to mention the higher possibility of accidents. Train accidents are more frequent than many realize—something that could render oil companies vulnerable to lost assets, litigation, and cleanup costs.
And the oil capacity for rail and truck is no match for seamless pipeline transport.
The lack of pipeline infrastructure will no doubt cause oil companies to rely on rail transportation to get their crude out of state, but it does have consequences in the overall market.
Since oil is not being moved with peak efficiency, the costs associated with relying on mobile transportation build up in the long run. This could hamper a company’s ability to invest in new drilling technologies or explore unforeseen territories in crude-rich grounds.
Investing in Oil Transportation
The main reason why West Texas Intermediate and Brent Crude have had a large gap is because there is not enough pipeline structure in place to ship crude to the Gulf Coast for refining and shipping.
The traditional $20 gap between Brent and WTI has narrowed recently, since partners Enbridge Energy Partners and Enterprise Products Partners reversed their Seaway pipeline to the Gulf Coast, according to The Christian Science Monitor.
The best bet when it comes to investing in oil transportation is to look for the companies that are doing the construction and transporting. Enbridge and Hiland Partners are companies in the pipeline field, but it does not have to be in pipeline transportation alone. Railway transportation for oil is becoming one of the fastest growing industries, as more rail networks are being constructed to meet demand.
Billionaire investor Warren Buffett invested in Bakken oil shipments when he decided to purchase Burlington Northern Santa Fe (BNSF). Phillips 66 (NYSE: PSX) signed agreements with Enbridge, Targa Resources (NYSE: NGLS), and Magellan Midstream Partners (NYSE: MMP) for transportation of crude to Phillips-based refineries.
Norfolk Southern (NYSE: NSC), CSX (NYSE: CSX), and Union Pacific Corp. (NYSE: UNP) are a few train companies dealing in oil, and more companies are likely to engage the oil market as the need for transportation increases. Union Pacific Railroad and BNSF deal directly in the Bakken shale region.
Oil transport by train may be more costly, but there are advantages over pipelines. Investors will not have to worry about property rights, government regulation, or politics.
If major pipeline projects fall through, there is always the rail transportation industry to fall back on as an investor. Whichever transportation method you may fancy, just know that pipeline and railway are two transportation markets that are in demand, and both sectors will grow exponentially as the oil boom continues.
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