Benchmarking Bakken NGLs and Midstream Infrastructure

Continuing with our NGL Benchmarking series, this month let us take a deep dive into another key basin – the Bakken. A drop in crude prices due to the COVID19 and OPEC price war has hit Bakken shale basin hard, with ~0.7 Bcf/d and ~0.4 Million Bpd drops in gas and oil production, respectively, since Dec 2019. This has also impacted NGL production out of the Bakken. Will Bakken regain its glory any time soon? The uncertainty on DAPL’s future has added one more wrinkle to the situation…

Where we have been to where we are:

Drilling activity in Bakken has drastically slowed down, with rig count dropping from the highs of 53 in Jan-2020 to 10 today, according to Baker Hughes. We’ve seen this story before: from late 2014-early 2015, we saw a big dip in the crude oil price followed by falling rig counts in the basin. The Bakken rig count (and crude oil prices) never fully recovered to pre-2014 levels, stabilizing around 50 rigs on average. Current oil prices appear stable at around $40/Bbl although we have not yet seen any recovery in drilling activity.

Natural gas flaring in the basin has decreased the past two quarters, partly due to additional gas processing capacity from multiple new gas processing plants, and also because of the drop in production activity In 1Q 2020. The Bakken processed around 2.5 Bcf/d of wet gas (or ~80% of total gas produced), largely associated with crude oil production. Gas processing infrastructure has increased along with wet gas production. Current processing capacity in the Bakken currently stands at ~3.2 Bcf/d, with basin aggregate utilization at 79% for 1Q 2020.

Unlike the Permian, the Bakken gas processing landscape is highly consolidated (just like Appalachia). The top 5 processors operated 80% of total capacity and 83% of processed volumes in 1Q 2020. Oneok was the top processor, with capacity of 1.4 Bcf/d in the basin; it processed about 1.1 Bcf/d of gas. Challenging ethane frac spreads has resulted in increased ethane rejection in Bakken since Dec 2019. Through late 2Q 2020, ethane prices at Mont Belvieu had been soft, barely staying above natural gas prices in the U.S. Gulf Coast. Since Bakken is the farthest region from Mont Belvieu relative to other U.S. shale basins (and therefore faces higher T&F fees), there is little to no economic incentive for Bakken gas producers to extract high levels of ethane. This dynamic resulted in ethane rejection to the tune of ~230 MBPD for 1Q 2020. Ethane extracted in 1Q 2020 for the Bakken basin was a mere 73 MBPD, or about ~24% of total estimated ethane entrained in the gas stream.

Propane+ (C3+) supply in the Bakken basin for 1Q 2020 stands at 267 Mbpd, with OneOk’s share at ~125 Mbpd, about 47% of the basin’s C3+. Since 4Q 2019, the OneOk Elk Creek pipeline has been a game-changer for disposition of the Y-grade barrel. As expected, there has been a significant drop in rail utilization to move Y-grade supply. The percentage share of rail/truck dropped from ~70% in 2018 to just ~20% in 1Q 2020. To make matters worse for Bakken producers (and prolong crude oil recovery), A federal judge’s recent order to take Dakota Access Pipeline be out of service for a year or more starting August 5. The decision could wreak havoc for producers in the Bakken Shale at a time when they are still reeling from drastic, COVID-related production curtailments. Energy Transfer (DAPL’s operator) has since won a stay order, but uncertainty remains as to how this will impact crude recovery and therefore NGLs in the Bakken.

Where we go from here:

Drilling activity in the Bakken has drastically slowed due to COVID-19: recovery may be a painful and prolonged process, especially if DAPL temporarily ceases operations. Consequently, midstream companies are also slowing expansion plans. Current available pipeline and rail capacity is insufficient to meet takeaway needs, after the DAPL ruling. Even at full utilizations (which is not possible, practically), they might just be able to ship 1 Million BPD of oil from the basin – still lower than the production highs seen pre-COVID. Even then, connectivity issues arise, as not all the producers who used the DAPL will have access to alternative logistics.

On the midstream end, around 400 MMcf/d of new processing capacity addition have been put on hold. Another 400 MMcf/d of new processing capacity is scheduled to come online by Mid 2021.