New pipe caters to sweet Bakken crude, steers clear of oil sands flow

While the Bakken play has stepped into the national limelight as the main engine of burgeoning U.S. oil production, few are aware that producers in the red-hot North Dakota shale field face a surprising lack of pipeline takeaway capacity.

The North Dakota Department of Mineral Resources highlighted this fact in an August report that revealed that more than half of the state's oil is currently moved to market by truck or train due to limited pipeline infrastructure.

Now Enbridge Inc. is seeking to address that problem with a $2.5 billion pipeline project that not only boosts takeaway capacity for the Bakken, but provides a separate route to market so its prized light sweet crude does not have to mix with lower-value heavy sour crude from Alberta's oil sands fields during transport.

The Canadian pipeline giant outlined its plans for the Sandpiper project in a November 2 filing to the Federal Energy Regulatory Commission seeking permission to proceed with new pipeline, which it says is needed in light of projections showing Bakken production continuing to grow and available capacity shrinking fast on its Lakehead system, which serves both the Bakken and Alberta oil sands.

The company said it has already boosted capacity on its North Dakota mainline system from 80,000 barrels per day (bpd), to more than 210,000 bpd over the past six years, and it expects pipeline demand to keep increasing. In addition, Enbridge expects Lakehead to reach full capacity in the near future as unconventional crude production from the Alberta oil sands ramps up as well-a problem that has raised new regulatory headaches for the pipeline operator in recent months.

Enbridge says its two-segment Sandpiper project-scheduled to come on line in 2016-is designed to increase takeaway capacity for the Bakken while also allowing its sweet crude to avoid part of the Lakehead system, thus reducing mixing with sour oil sands crude.

One segment will involve Enbridge laying a 24-inch pipeline to "twin" its existing North Dakota mainline, stretching 375 miles from Tioga, N.D., to Clearbrook, Minn. The company said that leg of the system will more than double its transport capacity from the Bakken to Clearbrook by 225,000 bpd for a total of 435,000 bpd.

The second part of the project involves Enbridge removing the existing North Dakota mainline interconnection with the Lakehead system at Clearbrook. In the FERC filing, Enbridge said that would better serve Bakken producers by ensuring that their sweet crude is not mixed during transport with diluted bitumen (dilbit) from the oil sands.

Light sweet crude oil from the Bakken is valuable to many refiners because it is relatively easy to process, while the heavy sour dilbit from the oil sands is more costly to refine. By routing the two grades of crude into different pipelines, Enbridge said it will help Bakken producers get more dollars per barrel.

"This new configuration will assure Enbridge North Dakota shippers of a dedicated line from receipt points in Montana and North Dakota all the way to Superior [Wis.,] providing substantial benefits including...increased protection of the quality of their crude," the company told FERC

In addition, Enbridge said removal of the interconnection would prevent shippers from having their oil stranded in Clearbrook due to capacity apportioning when the Lakehead system is oversubscribed.

Instead, a new 375,000 bpd pipeline will be built from Clearbrook to Superior, Wis., following the right-of-way of the Lakehead system. Superior is a hub for several Enbridge pipelines; from there, oil can travel to a variety of markets on the company's extensive network.

"The relocation will bypass forecasted capacity constraints for that segment on Lakehead, thus facilitating the transportation of crude to midwestern, eastern and southern markets...," Enbridge said in explaining proposed new tariffs to support the project.

"Thus, although all Enbridge North Dakota shippers moving beyond Clearbrook will pay the increased rate to recover the costs of the Sandpiper extension to Superior, all shippers will receive the benefits of increased capacity, decreased apportionment risk, and better protection of the quality of their crude."

Enbridge's decision to remove the interconnection at Clearbrook may come as a relief to shippers and end consumers, some of whom have alleged to FERC that the company is favoring oil sands shippers on Lakehead so it can fill capacity on its upstream pipelines in Canada with dilbit.

Toledo Refining Co. LLC on May 11 accused Enbridge of favoring heavy sour crude oil shippers on Lakehead at the expense of those moving light sweet crude on in order to increase business on Enbridge's upstream pipelines moving Canadian crude.

Also in May, independent infrastructure developer High Prairie Pipeline LLC said Enbridge was setting unreasonable terms for a new North Dakota oil pipeline planned by High Prairie that would interconnect with the Lakehead system. High Prairie alleged Enbridge was seeking to block the interconnection to prevent additional flow of North Dakota crude into the Lakehead system, thus preserving Lakehead capacity for dilbit being transported south by Enbridge's upstream Canadian pipes.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.