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Bakken oil tanks full to the brim

North Dakota's oil patch is booming. But surging oil and gas output has strained off-take capacity to breaking point

It's a cold night in Williston, North Dakota. The wind whips snow through the air, diffusing the harsh light from gas flares, giving the deepening dusk an ethereal glow. In every direction, dots of orange flicker on the horizon and blue-tinged columns of light from drilling-rigs' flood lamps pierce the night sky. The Bakken Shale – the largest onshore oilfield in the US Lower-48 states – is in the eye of a growing storm.

The town of Williston lies at the centre of hundreds of thousands of square kilometres of oil-prone shales, a crossroads leading into neighbouring Montana and north into the Canadian province of Saskatchewan, where unconventional drilling has unlocked an almost immeasurable treasure of light crude oil. The US Geological Survey (USGS) is reviewing its previous estimate of 4.3 billion barrels of recoverable reserves in the Bakken. Some believe this desolate patch of North America could hold 100 billion barrels, with the promise that there may be even more resources trapped within the Three Forks formation, which underlies the Bakken.

Little wonder, then, that there are more trucks and tractor-trailers than people in Williston, which has a population of 15,000. The main road through the town, US 2, is bumper-to-bumper with traffic, as the weather deteriorates and a treacherous sheen of black ice forms across the road.

Unstoppable growth?

The bad weather doesn't stop the frenetic activity in the oil patch. Work continues 24-hours a day, seven days a week. It will take more than a winter blast from the prairies to chill North America's hottest, and fastest-growing, source of domestic oil production.

From just 2,000 barrels a day (b/d) in 2000, in January, Bakken oil production topped 510,000 b/d for the first time; and is expected to reach 1 million b/d by the end of the decade. Natural gas output increased by 53% in 2011, to 521 million cubic feet a day (cf/d), contributing to an already growing gas surplus in North America.

The Energy Information Administration(EIA) expects US oil production to top 6 million b/d in 2013 – the first time it has hit such a level since 1998 – driven by onshore shale plays such as the Bakken.

The benefits are being felt at a time when the rest of the nation is struggling with economic recovery. It's too early to call towns like Williston islands of prosperity, but they are fast becoming places where job-seekers from Texas, Louisiana – even California – come looking for work. North Dakota's population reached 1 million for the first time last year, and the state has the lowest unemployment rate in the US at about 3% – almost a third of the national average of 8.5%, according to the US Bureau of Labor and Statistics.

A large part of this buoyancy is credited to the drilling industry. Virtually all of North Dakota's growth has taken place since 2006, following the advent of modern horizontal drilling and hydraulic-fracturing (fracking) technology. According to Baker Hughes, 197 rigs were drilling in the Williston basin in the week ended 13 January, in the seasonal peak. About 97% of those units were carrying out horizontal or directional drilling, and all of the rigs were targeting oil. At the same time last year, just 71 rigs were operating in North Dakota.

The statistics merely confirm what the locals already know. A T-shirt on sale in a local truck stop reads: "Life in Oil Country ... It's just one fracking thing after another around here."

Pressures ahead

But despite the undeniable success, the Bakken faces an acute infrastructure deficit that threatens production growth. And it's not just about rutted roads and the lack of decent places to eat or sleep – although those are also pressing concerns on a Friday night in a snowstorm.

There are thousands of tanker-trucks rumbling down the highway because there is not enough pipeline capacity to carry North Dakota's rising oil production to market. At railway sidings across the Bakken, oil cars wait to be filled with crude.

The proposed Keystone XL oil pipeline would devote a portion of its space exclusively for Bakken producers, but constant delays have only served to increase the amount of oil that moves by truck and rail. And it's affecting public safety. North Dakota experienced a 30% increase in traffic fatalities on its roads last year – 148 people died in collisions, compared with 105 in 2010. Officials say the rise is a direct result of the higher numbers of vehicles on roads. Towns such as Watford City, population 200, see more than 2,000 trucks pass through every day.

While there are plans to build more pipelines, they can't come online fast enough to keep up with production.

In late 2011, Enbridge gained approval for the Canadian portion of its Bakken pipeline from Saskatchewan, connecting to the mainline that feeds into the Great Lakes and down to Oklahoma and Texas. It's awaiting approval for associated pipes, storage facilities and rail terminals on the US side of the border that together would add about 310,000 barrels of storage and 150,000 b/d of takeaway capacity when it becomes operational in 2013. New additions are planned all along the highway from Minot, at Berthold, Stanley and Beaver Lodge.

But given the furious pace of output growth in the Bakken, that would soak up barely a year's increase in production. And the routing – through Minnesota, Michigan and Illinois before reaching the main trading hub at Cushing, Oklahoma, is both long and indirect.

Enbridge hopes to provide low-cost transport options on established pipelines that have been in service since the 1960s, but it's clear that the Bakken will need some form of direct market access if it has any hope of hitting 1 million b/d any time soon.

Given the pipeline bottlenecks in the broader US market, especially at the main trading point of Cushing, the Bakken is finding itself backed down the line, forced to trade at discounts to benchmark US prices, further eroding margins. In addition, surface water is relatively scarce and producers are paying higher prices for fracturing fluids, pushing costs up further.

A question of gas

Probably the most troubling indicator of the failure to keep up with growth is the proliferation of flare stacks through the countryside. The EIA estimates Bakken producers are flaring about 37% of all natural gas produced, around 175 million cubic feet a day (cf/d) – or enough to heat 2,300 homes for a year in a notoriously cold part of the country. Locals are understandably uneasy about wasting such a valuable resource. By contrast, less than 1% of US gas production was vented or flared in 2009, and about 3% worldwide.

Under North Dakotan law, producers can flare for a year without paying royalties to the state and are eligible for extensions if they can demonstrate "economic hardships". In effect, taxpayers are covering the losses. Little wonder there's hardly any incentive to bring the gas to market.

It's an alarming disparity that underscores the urgent need to build new gas-gathering and distribution systems. But with North American natural gas prices hovering near 10-year lows, it's cheaper to flare the gas, despite studies linking the practice to troubling environmental and health problems among humans and livestock.

Nonetheless, local governments are hoping $3 billion in infrastructure improvements will reduce the total amount of gas flared to 10% in coming years. But even with new gas-gathering systems in place, Bakken producers will still be flaring substantial gas volumes, losing potential revenue in the stampede to develop the play's higher-value oil. It's precisely this sacrifice of the future value of the gas that may yet prove to be an Achilles heel.

Shifting into high gear

Despite logistical troubles, production and transport issues are being improvised with surprising creativity, which has allowed output to grow. Dakota Oil Processing plans to build a 20,000 b/d diesel refinery to address fuel shortages at the oilfield itself, the first new refinery in North Dakota in 35 years. In January, Tulsa-based Oneok Partners brought a 100 million cf/d processing plant on line, helping reduce flaring and providing much-needed gas capacity.

But it's barely enough to keep pace with the blistering pace of growth seen over the past five years, let alone that forecast for the years to come. The Montana Energy Department expects activity levels to remain high for at least the next decade. In that sense, the Bakken represents both a huge prize and a tough challenge.

The Bakken offers the US an ideal opportunity to increase its domestic oil supply and reduce dependence on imports. The easy part is drilling the wells. Much harder, is resolving the above-ground infrastructure bottlenecks that threaten to delay and curb expansion. After a decade of almost uninterrupted growth, the Bakken is in danger of bursting at the seams.

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