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Is the Dakota Access Pipeline Delivering What it Promised?

Energy Transfer Partners, L.P.’s ETP Dakota Access pipeline has been benefiting oil producers in Bakken Shale.  We note that the opening of the pipeline was mired in controversy. However, once it became fully operational in June 2017, this 1,172-mile pipeline has proved to be beneficial for producers in the region.

How?

The pipeline, with a capacity to carry about 520,000 barrels of oil per day, was targeted to bridge the gap between Bakken players and producers in other U.S. oil-producing areas like the Williston and Permian basins. The geographically constrained Bakken Shale's crude has now better access to Gulf and East Coast refineries and also reaches international markets. As expected, the pipeline, where oil majors like Phillips 66 PSX, Enbridge Inc. ENB and Marathon Petroleum Corporation MPC have invested,    has helped to improve the region’s drilling economics by lowering transportation costs for operators and benefit the state financially.  

Products from companies like Continental Resources, Inc. CLR and Hess Corporation HES were among the first to reach the international markets (China and Netherlands), with the help of Dakota Access.

Owing to improved access to the markets, discount for Bakken crude has gone down from $7 or $8 to $5. This has increased the number of operational rigs in the region from 38 in January 2017 to 53 at the end of 2017. If the current oil price environment persists, the number of active rigs is expected to increase in the coming quarters. Production per rig is higher in the Bakken Shale than most of the other shale plays in the United States. The rise in rig count pushed oil production from around one million barrels per day (bpd) to 1,185,000 bpd. Moreover, in October alone, the state witnessed an all-time high total output of more than 2 billion cubic feet of natural gas per day.

With an increase in output, revenues are expected to surge for oil producers and the state as well. During the first year of operations, the state is expected to receive $250 million in tax. It had put North Dakota state-revenue 17% higher than estimated. Notably, during the first five months of the pipeline’s operation, state revenues were $43 million higher than previous projection.  

Crude transportation has become much easier since the introduction of the pipeline. Previously, 12 trains with 100 cars used to ship oil out of the state, which now has reduced to two. It has lessened the risk of accidents and spills.

In addition with the financial perks, the pipeline has provided jobs for locals both directly and indirectly. It has lowered the rate of unemployment in the North Dakota state to 2.8%, while the U.S. unemployment rate is 4.1%.

The Dakota Access Controversy

The pipeline, which was supposed to become operational by the end of 2016, faced immense objection delaying the commencement of services. Work on the project was halted by the Obama administration amid protests from a Native American tribe, blocking the construction of the final part of the pipeline through North Dakota. The protests of Standing Rock Sioux Tribe drew international attention. They were of the opinion that the pipeline would desecrate their sacred burial ground as well as contaminate the water supply. Efforts to complete the Dakota Access Pipeline were restarted after President Trump brushed aside former President Obama’s efforts of blocking the pipeline's construction. Trump ignored the bitter opposition from environmental activists and ordered the completion of the pipeline.

The pipeline, despite the pending litigation against its operator, has already leaked at least three times. However, in early December 2017, a judge paid heed to the request of the tribe. It asked Energy Transfer Partners and the U.S. Army Corps of Engineers to develop an oil spill response plan for the stretch of pipe below the Missouri River, which is due in April 2018.

Although the $3.8 billion Dakota Access Pipeline by Energy Transfer Partners, a Zacks Rank #3 (Hold) company, has faced criticism, it has also proved to be beneficial in some respects. With the expected positive results from the project, it will be hard to cast a vote against the pipeline. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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