CLEVELAND, Nov. 16, 2016 (IEEFA.org) — The Institute for Energy Economics and Financial Analysis today published a report noting weaknesses in the financing behind the Dakota Access Pipeline and questions around the long-term usefulness of the project.
The report—“The High-Risk Financing Behind the Dakota Access Pipeline: A Potential Stranded Asset in the Bakken Region of North Dakota”— describes how the company behind the pipeline is under extreme financial to complete the project and how the pipeline is at risk of becoming a stranded asset in the region’s overbuilt oil-transport infrastructure.
“While the Dakota Access Pipeline has gained notoriety for questions it raises about tribal sovereignty and its impact on drinking water, we’ve found serious, less-publicized problems around the finances and economics of the project,” said Cathy Kunkel, an IEEFA energy analyst and lead author of the report.
The report notes that the project faces a Jan. 1 completion deadline that it cannot meet, a failure that would trigger a potential reset with producers and shippers who can renegotiate contracts signed two years ago with the developer, Energy Transfer Partners.
“Because the economic prospects for Bakken oil producers have dimmed dramatically since early 2014, oil shippers—in the interest of protecting their investors and shareholders—may attempt to renegotiate terms when ETP misses its Jan. 1 deadline, seeking concessions on contracted volumes, prices, or contract duration,” the report states.
Clark Williams-Derry, co-author of the report and director of energy finance for the Sightline Institute, a Seattle-based energy industry think tank, said the Dakota Access Pipeline stands to fall victim to global oil markets, where prices have collapsed over the past two years.
“If oil prices remain low and Bakken oil production continues to collapse, DAPL’s capacity will quickly become superfluous,” Williams-Derry said. “The Bakken oil industry has already over-invested in infrastructure for moving oil, and the Dakota Access Pipeline could simply add to the glut.”
“Oil markets have changed radically since ETP first locked in its contracts,” Williams-Derry said. “Shippers have to be asking themselves if the contracts they signed in early 2014 still make sense. ETP boxed itself in with the Jan. 1 deadline.”
Williams-Derry said ETP’s contract predicament may explain some of the urgency in ETP’s push to complete the project, which is more than 80 percent done, against the tribal opposition of the Standing Rock Sioux.
“The Standing Rock Sioux may now be caught simply in the crossfire of a business dispute,” he said.
Kunkel said that if oil prices remain low, as projected, Bakken oil production will continue to decline.
“Existing pipeline and refinery capacity in the Bakken will be more than adequate to handle the region’s oil production,” Kunkel said. “The Dakota Access Pipeline could well become a stranded asset—one that was rushed to completion largely to protect favorable contract terms negotiated in 2014.”
Producers or shippers that have signed Dakota Access contracts include Phillips 66, Hess, Tesoro, and Oasis Midstream. The report notes that oil prices from January 2015 through September 2016 have averaged $45 per barrel, less than half the average price of $96 per barrel in 2013-2014.
Excerpts from the report:
Media contact: Karl Cates, [email protected], 917.439.8225
About IEEFA: The Cleveland-based Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce dependence on coal and other non-renewable energy resources.