Enbridge (NYSE: EEP) Threatens Bakken Producers

Brian Hicks

Written By Brian Hicks

Posted May 29, 2013

Earlier this month, Enbridge Energy Partners LP (NYSE: EEP) approached the U.S. Federal Energy Regulatory Commission with a proposal. If the request receives approval from the FERC, it would mean the proportion of hydrogen sulfide permissible in the crude shipped via Enbridge’s North Dakota pipeline would be significantly lowered.

Gas PipelineEnbridge argued that immediate safety concerns over employees’ direct interaction with the crude prompted the move. Moreover, Enbridge apparently found excessive amounts of sulfide gas in a storage tank at the rail terminal in North Dakota, and Bloomberg reports that the company insisted on either shutting down the terminal or limiting the hydrogen sulfide content. The terminal has a capacity of 80,000 barrels per day.

While Enbridge may simply be looking out for its employees, the company’s motion has resulted in counter-suits from two other companies in order to prevent Enbridge’s request from being approved. Marathon Petroleum Corp. (NYSE: MPC) and Murex Petroleum Corp. have both stated that their businesses would suffer should Enbridge’s request be granted.

Marathon uses Enbridge’s pipeline to ship crude to its refineries, while Murex—making similar arguments—emphasized that it is Enbridge that needs to account for the allegedly excessive hydrogen sulfide contents in its tanks. Later, Hess Corp. (NYSE: HES) and Plains Marketing also filed similar motions objecting to Enbridge’s proposal.

Enbridge wants to limit the proportion to 5 parts per million in crude. The company claims to have detected proportions as high as 1,200 ppm in one tank, which certainly does raise eyebrows. In its latest statement, Enbridge has said it remains open to accepting crude with high levels of hydrogen sulfide gas provided advance notification is given, but it would still reserve the right to shut down the facility if any crude arrives with hydrogen sulfide contents in excess of 5 ppm without advance notice.

Enbridge’s original request required a decision from the FERC in one day. That decision is now expected on June 7th.

The big fuss over hydrogen sulfide is because in small amounts, the gas can cause eye, nose, and throat irritations. However, as this Reuters excerpt indicates, greater proportions can quickly turn very risky indeed:

“Exposure at 50 ppm or above could cause shock, convulsions, coma or death,” Enbridge said in the filing, noting that at levels above 200 ppm, “respiratory failure can occur within seconds after only a few inhalations.”

Possible Impact

While Enbridge wants the new limit to be lowered to 5 ppm, Plains Marketing claimed other comparable companies set a limit of 10 ppm. Enbridge has pointed out that Tesoro High Plains Pipeline Co. also sets a 5 ppm limit. Clearly, this is a contentious point and there may be some exchanges back and forth regarding the final limit revision.

North Dakota’s Bakken shale continues to prove an enormously rich reserve; the state’s latest government figures indicated record production levels of 782,800 barrels per day in March. At the same time, rail transportation of crude oil has recently gained renewed prominence. This is driven by lack of adequate pipeline infrastructure (which, in turn, is the result of insufficient reversals and rerouting of pipelines, not to mention the development of wholly new pipelines).

As a result, producers in places with lacking pipeline access have turned toward rail shipments. One consequence of this, of course, has been the falling price difference between West Texas Intermediate and the Brent standard to a new two-year low.

Crude transportation is a major business, and Enbridge’s decision will be keenly observed by pipeline operators as well as oil and gas companies around the nation. The most immediate and pressing reason, of course, is that the verdict on Enbridge will affect all the companies that make use of Enbridge’s crude transport services. However, it’s likely that the decision in this case will reverberate and impact the broader oil and gas and related transportation sectors in short order.

Especially after the Deepwater oil spill and its massive aftermath, companies have been careful when it comes to safety protocols. However, the priority here is exploiting the Bakken without unduly crimping production levels. It’s that balance that is at stake, and how the FERC views this case is key to anticipating future movements in the sector.


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