Government scientists have just identified the largest deposit of oil in the United States. Newsflash: It is nowhere near the Dakota Access Pipeline (DAPL). On November 15, the U.S. Geological Survey released the largest estimate of continuous (unconventional) oil that USGS has ever assessed in the United States. The site is the Wolfcamp Shale formation in the Permian Basin of West Texas and Eastern New Mexico. USGS estimates the Wolfcamp play at 20 billion barrels.
There are two bits of significance for the fight against DAPL, the Black Snake, rooted in two theories of what the DAPL might be able to move if and when it is finished. The investment banks funding the Black Snake bought into the project based the state of the oil market at the time and expert projections for production over the life of the pipeline.
The oil market has shifted in many ways since the first round of DAPL financing was anticipating rising demand and more expensive supplies. Oil is a global market with lots of moving parts, including the Paris Accords on limiting carbon emissions reached in 2015, production coming on line from Iran and Libya, and (most important in the short term) the Saudi government giving up its attempt to bankrupt shale producers by throwing the Middle Eastern spigots wide open but causing a much smaller than expected price spike.
Now, the combination of the Water Protectors raising the human rights issue and the new discovery of lower cost shale oil threatens to further depress oil prices at the domestic end in a way that could affect both likely uses for the Black Snake.
The immediate objective of DAPL is moving oil from the Bakken Formation in North Dakota. Exploration in the Bakken was fueled by cutting-edge technology that squeezed oil from a part of the country with no substantial history of oil production. To do it, hardware had to be brought in from a distance and the oil moved out by rail. Even workers often came from elsewhere. The Bakken production happened on a steep upward curve, but oil produced from fracking shale appears to play out more quickly than conventional oil. In other words, the Bakken may have peaked.
The U.S. Energy Information Administration reports that oil production will be down 12 percent in the Bakken and 25 percent in the Eagle Ford year over year. The Eagle Ford is a shale play in South Texas that went on a producing toot roughly the same time as the Bakken. While monthly numbers do not make a trend, the latest DUCs (drilled but uncompleted wells) last month showed an increase of two in the Bakken and 85 in the Permian. Eagle Ford was down.
Another theory of how to monetize the Black Snake is as a piece of the Keystone XL pipeline that was halted by the Obama administration. Given that the Trump administration has promised quick approval for KXL, the Black Snake may be an auxiliary line in the sense that it goes in the direction KXL will go, south towards Cushing, Oklahoma.
The idea of KXL is to transport bitumen mined from the Canadian tar sands to the terminal in Cushing and from there to refineries capable of handling the dirty and heavy stuff along the Texas and Louisiana Gulf Coast. The coastal location is also handy for export, since the domestic market is unlikely to absorb all the potential production.
The hitch in the giddyup for the tar sands oil is it’s the most expensive way to produce petroleum. In order of cost, there is conventional drilling, offshore drilling, fracking, and bitumen mining bringing up the rear. Tar sands cannot compete on price with shale oil.
Further complicating the cost picture for both the tar sands bitumen and the Bakken shale oil is that the Permian Basin is a humongous and longstanding oil patch that has not even totally played out conventional resources. That means the pipelines from West Texas to the Gulf Coast refineries are already in place.
Estimates of Bakken oil reserves vary considerably as do estimates of the amount recoverable. Think of this in the context of the political controversy over “peak oil,” the point of maximum production we will ever see. The problem is that production is tied to the price of oil. Right now, the breakeven price in the Bakken runs about $40 a barrel, and prices have been trading just above that.
Since 2015, the rig count has continued to go up in the Bakken but the production per rig has been going down. Let the price of oil go back over $100 a barrel, and the definition of what is recoverable changes completely. As the new Wolfcamp oil comes on line—with a lower cost of production and transportation—the Bakken will be squeezed and the Canadian bitumen production even more so. A temporary squeeze is still a squeeze.
The estimated cost for the Black Snake is $3.8 billion. A project of this size needs funding from multiple sources, and the funders of the Black Snake are a who’s who of investment banks, not all of them based in the U.S.
A Norwegian Bank, DNB, is reexamining its commitment to DAPL as a direct result of the efforts of the Water Protectors. According to Oil Price.com, the Norwegian pension fund manager KLP holds part of the companies that will own the Black Snake, and it is reevaluating investment in the companies “behind the project who are accused of violating human rights.”
While this writer does not read Norwegian, it is plain from the pictures of the Water Protectors’ struggle that it is the Water Protectors, once again, who have put their bodies on the line to show the world this is a human rights issue—and at least part of the world is listening.
Kelcy Warren of Energy Transfer Partners has something in common with President-elect Donald Trump: He is used to getting his way. According to Jim Hightower’s Lowdown, Warren is the fourth largest contributor to Texas Gov. Greg Abbott by taking $700,000 out of the petty cash. Warren also helped fund the presidential run of former Texas Gov. Rick Perry to the tune of $6 million.
In Texas, Warren gets his way, but Hightower commented on the Water Protectors:
Not since Custer has an Anglo been as startled as Kelcy Warren by a powerful force of Indians thwarting his ambition.
The viability of DAPL is tied to the cost of production and transportation in relation to alternative sources like Wolfcamp. Every dollar spent on harassing the Standing Rock Sioux and their allies runs up the cost. Dogs and rubber bullets are not free and even locking up Water Protectors has a daily cost per cell that will find its way into the government’s calculations like the security guards do in Warren’s calculations.
The cost meter is running and the whole world is watching.