The Bakken Marcellus Disparity

For decades former Governor Ed Schafer and U.S. Senator John Hoeven worked to create a business-friendly environment in North Dakota.  One of their main goals was to construct a plan to attract energy companies to the Bakken.  In the crude oil area, it would appear the mission was accomplished.

“We are a leader in agriculture and now a leader in energy. Not only oil and gas but renewables,” Hoeven said. “When I started as governor, I think we were ninth in oil production. We produced less than 100,000 barrels a day and companies were not coming, they were leaving. So we worked very hard to create the kind of environment where they would come to North Dakota, crack the code on the Bakken.”

Since cracking the code, North Dakota has witnessed some historic economic success and public investments.  All signs of a strong industry.

“Now the only state that produces more oil than North Dakota is Texas. We produce 1.2 million barrels a day and I believe we will produce more in the future,” Hoeven said. “But you have to create an environment for that investment.”

With oil streamlining their operations and North Dakota understanding the fact the Bakken is not a boom but rather an industry, new market indicators ripple across the state.

The new trend in the Bakken appears to focus on the business climate of natural gas. North Dakota received multiple top story headlines across the globe due to their value-added natural gas announcements.  CHS and Badlands NGL represented the larger Bakken-affiliated announcements, which totaled nearly $5 billion in infrastructure.  Since those major announcements, both companies have more-or-less retooled their Bakken plans.

CHS has decided the numbers don’t work and will not be building the $3.3 billion dollar plant on the east side of the state near Jamestown.   The other major Bakken announcement came from Badlands NGL and their potential $4 billion dollar polyethylene plant.

“We intend to build two plants now, not one.” William Gilliam, CEO, Badlands said. “The first one will not be in North Dakota. It will be someplace else within the continental United States.”

When asked to confirm if there are still plans to construct a plant in North Dakota, Gilliam responded, “Absolutely.”

For Badlands NGL, this is a change in plans from their original Bakken timeline. The reason for a shift in construction timelines is the Bakken Marcellus disparity.

“If you are mineral rights holder or an oil and gas producer in the Marcellus,  Pennsylvania, Ohio or West Virginia, your wet gas is produced and you have methane in that wet gas. And regardless of where it gets sold, you get paid for it,” Gilliam said. “Because 300,000 barrels of it are being moved primarily to Europe. But also a little bit to India. And the polyethylene companies are paying the BTU value of the ethane, and they are paying the 35-cents a gallon it takes to get it there.”

Gilliam continued to elaborate on the 35-cents, which is actually an added figure to transport the hydrocarbons to Europe.  The price to India is unknown to Gilliam at the time of the interview, but does know the cost is be greater than 35-cents.

“In the Bakken, right now, if ethane is exported by Vantage to Canada or if it is exported by Aux Sable Alliance to Chicago or ONEOK to the Gulf Coast, you lose money on it,” Gilliam said. “So mineral right holders in North Dakota, oil and gas companies in North Dakota are subsidizing polyethylene companies. That is a disparity.”

According to Gilliam, the disparity comes from the marketplace not the logistics to getting it to market. The number of refineries in Europe, constructing specialized transportation vessels and long-term contracts have redefined the marketplace whereas payout are larger in the Marcellus than the Bakken.

“They (Europe) were facing billions of dollars worth of investment decisions if they didn’t find another source of ethane. In this case Enterprise and the producers in the Marcellus have come up with a very good formula where in fact the producers are getting paid instead of losing money,” Gilliam said. “The Bakken Marcellus ethane disparity is not a sustainable business model. It will not last. It will not stand.”

The new issues in North Dakota’s value-added industry reflect the ones from the early days of the Bakken.  The specifics may be different, but there are many similarities, including the networking of other energy plays and interacting with the global market.  Hoeven sees more options in natural gas as a way to solve many issues in energy overall.

“We need to continue to build the type of energy plan for this country, not just an energy plan here in North Dakota but an energy plan for the country,” Hoeven said. “Where we are energy independent or really energy secure. Meaning we produce more energy than we consume. We have to have that infrastructure to move that to move that energy safely and cost effectively to market.”

Hoeven stepped outside of natural gas to demonstrate how infrastructure is universal in energy development.

“That means the right mix of pipelines, road and rail, as well as transmission lines for electricity, in order to build that energy plan. That’s what we are working through and it’s not easy,” Hoeven said. “You have to make sure you deal with everyone fairly, respect property rights and do all those things. If it was easy someone else would have done it.”

Hoeven said an environment to allow infrastructure to develop needs to be looked at once again.

“We have to built the business climate in this country that enables us to out-compete every other country in the world, well part of doing that is being able to export oil, export natural gas so we have a level playing field for our producers so we can grow our energy industry here at home,” Hoeven said. “We are competing against OPEC, we are competing against Russia, we are competing Venezuela, and we want to win. Because it means a growing economy, more jobs and lower energy prices in our country it is a win all the way around.”

Back in the Bakken, ONEOK’s  200-MMcf/d natural gas processing facility in McKenzie County, the Lonesome Creek plant, is expected to be complete in the fourth quarter of 2015, according to Stephanie Higgins, communications, ONEOK.  Higgins said their natural gas compression projects saw positive performances.

“To take advantage of additional natural gas processing capacity as a result of better than expected plant performance at our existing Garden Creek and Stateline natural gas processing plants in the Williston Basin by a total of 100 MMcf/d. Expected completion is fourth quarter 2015,” Higgins said. “The installation of de-ethanizers at our Stateline I and II natural gas processing facilities capable of producing 26,000 bpd of ethane from the natural gas stream that will be delivered to a third-party ethane pipeline. Expected completion is fourth third quarter 2015.

She added their Bear Creek plant, an 80-MMcf/d natural gas processing facility in northwest Dunn County, North Dakota, has an expected completion timeline of third quarter 2016 and the Bakken NGL Pipeline expansion, Phase II, is second quarter 2016.

Furthermore, ONEOK Partners, L.P. (NYSE: OKS) announced in April that it entered into a 50-50 joint venture with a subsidiary of Fermaca Infrastructure B.V. (Fermaca), a Mexico City-based natural gas infrastructure company, to construct a pipeline that would transport natural gas from the Permian Basin in West Texas to Mexico.

The Roadrunner Gas Transmission pipeline project extends from ONEOK Partners’ ONEOK WesTex Transmission natural gas pipeline system at Coyanosa, Texas, west to a new international border-crossing connection at the U.S. and Mexico border near San Elizario, Texas, where it will connect with Fermaca’s Tarahumara Gas Pipeline, according to Higgins.

“This strategic pipeline project gives us the opportunity to add to our extensive 36,000-mile integrated network of natural gas and natural gas liquids pipelines,” Higgins said.

Looking to a few other plays outside the Bakken, ONEOK recently acquired the West Texas LPG pipeline and the Mesquite pipeline, increasing their presence in the Permian Basin.

“We are also located in multiple high-producing NGL-rich basins, including the Williston Basin, the Powder River Basin, and the Cana-Woodford and SCOOP plays in Oklahoma,” Higgins said. “We are always evaluating additional opportunities in new areas to increase our basin diversification and add to our operating footprint.”

Higgins sees the natural gas trends turning around, at least from the wells.

“We anticipate natural gas gathering and processing and NGL volumes to significantly increase during the second half of this year as new wells are connected to our systems,” Higgins said. “We complete field compression projects and capture natural gas currently being flared in the Williston Basin and new natural gas processing plants are connected to our NGL system in the Mid-Continent and Rocky Mountain regions.”

Gilliam still sees the Bakken as a viable location for Badlands NGL, but there are some business climate issue to iron out.

“There are challenges to building this in North Dakota, if you stick built this polyethylene plant just like you would on the gulf coast, the peak employment would be 9,000 people,” Gilliam said. “Now we may not reach 9,000 but there are counties we are considering that do not even have 2,000 people living in them. So there are going to be some very formidable challenges. But we feel it has to get built.”

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