The twisted eco­nomics of the Dakota Ac­cess Pipe­line

The Denver Post - - PERSPECTIVE - By Jonathan Thomp­son High Coun­try News

As the weather gets colder, the fight over the Dakota Ac­cess Pipe­line is heat­ing up, in rather ugly ways. Just days be­fore Thanks­giv­ing, law en­force­ment of­fi­cers tried to blast the protesters away with wa­ter can­nons in 25-de­gree weather and em­ployed other “less than lethal,” though still harm­ful, dis­per­sal meth­ods.

High Coun­try News has re­ported what’s at stake for the Stand­ing Rock Sioux tribal mem­bers and their al­lies try­ing to stop or re-route the project: Tribal sovereignty, wa­ter, en­vi­ron­men­tal jus­tice, holy lands, treaty-rights and an­tiq­ui­ties. Add to that the prospect of more car­bon spew­ing into the at­mos­phere, and one can see why ac­tivists are risk­ing so much to stand in the pipe­line’s way.

Less clear is what the $3.78 bil­lion, 1,172mile-long crude oil pipe­line of­fers in re­turn if and when con­struc­tion is com­pleted and it goes into op­er­a­tion. En­ergy Trans­fer Part­ners, the project’s main pro­po­nent, says that the pipe­line will of­fer jobs, eco­nomic re­lief to a strug­gling re­gion and, by spurring pro­duc­tion of North Dakota Crude, it will take the U.S. closer to the lofty ideal of en­ergy in­de­pen­dence.

Con­struc­tion on the pipe­line is about 85 per­cent com­plete and it has, in­deed, put peo­ple to work. Yet it is not clear how many new jobs have been cre­ated since the jobs are spread out over 1,000 miles. Ru­ral towns along the pipe­line’s cor­ri­dor have re­ported a boost in ho­tel and camp­ground oc­cu­pancy rates as the con­trac­tors move through. That, in turn, gen­er­ates sales and lodg­ing tax rev­enues for the lo­cal gov­ern­ments. The boost, how­ever, won’t last. In a few months, when (and if ) con­struc­tion is com­plete, the work­ers and their spend­ing money will de­part. The fin­ished pipe­line will re­quire just 40 per­ma­nent main­te­nance and op­er­a­tional jobs along its en­tire stretch.

Once oil is flow­ing, prop­erty tax rev­enues — an es­ti­mated to­tal of $55 mil­lion an­nu­ally — will kick in. While it’s a big chunk of change, the im­pacts will be dif­fused, shared by four states. North and South Dakota are ex­pected

to re­ceive about $13 mil­lion each, di­vided be­tween sev­eral coun­ties, a drop in the bud­get bucket. (Colorado gen­er­ates nearly $20 mil­lion per month from taxes and fees on mar­i­juana.)

That said, it might be enough to buy the county sher­iffs some more mil­i­tary gear from the Pen­tagon in or­der to squelch the next pipe­line protest. It will not, how­ever, cover the costs of such squelch­ing: The cur­rent law en­force­ment ef­fort has re­port­edly cost $15 mil­lion so far.

The fact is, pipe­lines, like trans­mis­sion lines, don’t have a ma­jor eco­nomic im­pact ex­cept when they’re built. They oth­er­wise go mostly un­no­ticed un­til they spill, burst or ex­plode.

The big­ger-pic­ture im­pact, whether on cli­mate change or en­ergy in­de­pen­dence, is more dif­fi­cult to suss out. Both pro­po­nents and op­po­nents seem to be work­ing on the “build-it-andthey’ll-fill-it” premise. That is, if you ex­pand pipe­line ca­pac­ity for North Dakota crude, it will en­cour­age more oil drilling and thus more oil pro­duc­tion. If more do­mes­tic oil is pro­duced, the logic goes, then we have less need to im­port for­eign oil and we achieve greater en­ergy in­de­pen­dence. The flip side to that is, the more oil we drill, the more we con­sume, re­sult­ing in greater car­bon emis­sions. It’s summed up in this nifty for­mula:

More pipe­line ca­pac­ity –> more oil pro­duc­tion –> more en­ergy in­de­pen­dence and car­bon emis­sions

This for­mula, how­ever, holds only if lack of pipe­line ca­pac­ity is a ma­jor hin­drance to oil de­vel­op­ment. It’s not. We can move crude oil not only through pipe­lines, but also with trucks, trains and tankers. Oil’s mo­bil­ity helps make it a global com­mod­ity in a way that nat­u­ral gas, for ex­am­ple, is not. The lack of pipe­line ca­pac­ity is not a ma­jor lim­it­ing fac­tor in oil de­vel­op­ment and pro­duc­tion.

Just as the big­gest driver of oil de­vel­op­ment is a high oil price, the big­gest hin­drance, par­tic­u­larly for ex­pen­sive-to-drill North Dakota crude, is a low oil price. That re­la­tion­ship has been on dis­play in North Dakota, and across the West, for the last decade: Oil prices went up, thanks to bur­geon­ing de­mand in China and the de­vel­op­ing world, so drilling in­ten­si­fied and pro­duc­tion went ba­nanas. Oil prices crashed as China’s eco­nomic growth slowed, the drill rigs were stored away and pro­duc­tion has de­creased.

Very few wells have been “shutin” or plugged up. Most of the al­ready-drilled wells con­tinue to pro­duce, but at lower and lower rates, a phe­nom­e­non known as the “de­cline curve.” Wells that pro­duced 220 bar­rels per day when they were drilled in 2005, for ex­am­ple, now only pro­duce about 20 bar­rels per day.

When these crit­i­cal fac­tors — global sup­ply vs. de­mand and price — are in­tro­duced into the afore­men­tioned for­mula, the out­come be­comes far murkier. No longer does more pipe­line ca­pac­ity di­rectly lead to more pro­duc­tion; it must first ei­ther raise the price of oil or in­duce de­mand. The lat­ter’s not go­ing to hap­pen. A pipe­line across the up­per Mid­west will not in­spire the masses in China to buy cars and drive them all over the coun­try. It will not af­fect global de­mand.

So how about price? The Dakota Ac­cess Pipe­line is ex­pected to carry half-a-mil­lion bar­rels of oil per day to re­finer­ies and mar­ket hubs in Illi­nois. Mov­ing a bar­rel of oil on the pipe­line is ex­pected to cost about $8, com­pared to ap­prox­i­mately $15 for ship­ping it via rail. That is, if the pro­ducer would have re­ceived $34 per bar­rel for rail-shipped oil, it will get $41 per bar­rel for Dakota Ac­cess Pipe­line-shipped oil.

This $7-per-bar­rel bonus could add up to hun­dreds of thou­sands of dol­lars in ad­di­tional rev­enue for the pro­ducer over the well’s life, and could cer­tainly keep wells from be­ing shut-in. Yet it’s doubt­ful that it’s enough to push the pro­ducer to dust off the rigs and start drilling again. It costs any­where from $5 mil­lion to $15 mil­lion to drill a well in North Dakota’s Bakken for­ma­tion.

There is one other way the pipe­line could im­pact oil prices, at least for the oil flow­ing through the line. Some oil cus­tomers re­port­edly en­tered into con­tracts with pro­duc­ers prior to con­struc­tion to buy DAPL oil at or near 2014 prices. If those con­tracts re­main in place de­spite the protest-caused con­struc­tion de­lay, it could, the­o­ret­i­cally, push pro­duc­ers to drill a few more wells to pro­duce enough oil to fetch the higher price. But prob­a­bly not. It’s more likely that those pro­duc­ers will sim­ply di­vert oil now shipped by rail to the pipe­line, thus in­creas­ing profit with­out in­creas­ing pro­duc­tion.

If, some­how, the pipe­line were able to in­crease oil pro­duc­tion, then we’d still have another vari­able to plug into our equa­tion. I’ll call it the T. Greg Mer­rion fac­tor, for the New Mex­ico oil ex­ec­u­tive who told me about it: “Noth­ing helps low prices like low prices, and noth­ing hurts high prices like high prices.” That is, the in­creased sup­ply de­liv­ered by the pipe­line (with­out a con­se­quent in­crease in de­mand) would in­crease the amount of oil sup­ply on a mar­ket where de­mand can’t keep up with sup­ply. The glut grows. Prices slide fur­ther down­ward. There’s even less drilling. Pro­duc­tion slides. The cy­cle con­tin­ues.

The Dakota Ac­cess Pipe­line, on its own, is not likely to re­sult in in­creased pro­duc­tion of North Dakota Crude, be­cause more pipe­line ca­pac­ity does not equal more de­mand. There­fore the pipe­line will not cre­ate more oil­field jobs or re­sult in higher sev­er­ance tax rev­enues to North Dakota.

If there is any uptick in pro­duc­tion thanks to the pipe­line, it won’t be enough to put a dent in the 5.2 mil­lion bar­rels of oil the U.S. con­tin­ues to im­port each and ev­ery day. Since the pipe­line won’t push more pro­duc­tion, it also will not re­sult in more con­sump­tion. There­fore, it will not di­rectly lead to a sig­nif­i­cant in­crease in car­bon emis­sions. Which is to say, the pipe­line will be nei­ther the eco­nomic boon, nor the cli­mate bane, it’s been made out to be.

Why, then, is En­ergy Trans­fer Part­ners so in­tent on build­ing this thing? The equa­tion that an­swers that one is far sim­pler. If the pipe­line in­deed car­ries 470,000 bar­rels per day, at a rate of $8 per bar­rel, the com­pany should gross about $1.37 bil­lion per year. Op­er­at­ing costs are low, so it shouldn’t take long to re­coup the cap­i­tal costs. That leaves a lot for the in­vestors, like En­ergy Trans­fer Part­ners’ bil­lion­aire CEO Kelcy War­ren, or re­puted bil­lion­aire and Pres­i­dent-elect Don­ald Trump.

Yes, Trump is in­vested in the com­pa­nies be­hind the pipe­line, though the amount of his stake de­creased sub­stan­tially be­tween 2015 and 2016. Mean­while, War­ren do­nated more than $100,000 to Trump’s cam­paign, clearly hop­ing he would re­move fed­eral ob­sta­cles to the pipe­line.

These num­bers are worth con­sid­er­ing when you see the images of the “wa­ter pro­tec­tors” get­ting pum­meled with wa­ter can­nons, rub­ber bul­lets and tear gas. They’re not be­ing at­tacked in the name of jobs, the econ­omy or en­ergy in­de­pen­dence. They’re be­ing at­tacked in the name of profit.

A sec­tion of the Dakota Ac­cess Pipe­line un­der con­struc­tion where sev­eral clashes be­tween pipe­line protesters and se­cu­rity have taken place near the town of St. An­thony in Mor­ton County, N.D. Tom Stromme, The Bis­marck Tri­bune via AP

Dakota Ac­cess Pipe­line protesters stand waist-deep in the Can­tapeta Creek, north­east of the Oceti Sakowin Camp, near Can­non Ball, N.D., fac­ing armed of­fi­cers in riot gear who hit dozens with pep­per spray. Mike Mc­cleary, The Bis­marck Tri­bune via AP

Robyn Beck, AFP/Getty Images

A pro­tester is treated af­ter be­ing pep­per-sprayed by pri­vate se­cu­rity con­trac­tors with at­tack dogs on land be­ing graded for the Dakota Ac­cess Pipe­line oil pipe­line, near Can­non Ball, N.D.

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