Oil pipelines were once viewed as solid investments with stable earnings as demand for oil increased while Bakken shale oil production boomed and Canadian oil sands production grew. That’s changing. The oil markets are shifting, and investors are questioning whether there is sufficient supply support and demand to justify the many new proposed pipelines. 

Bakken shale oil and Canadian oil sands market prices are low, and oil production is falling. Enbridge Energy Partners (NYSE:EEP) just announced it is further delaying construction of both its controversial proposed new Sandpiper oil pipeline and its Line 3 replacement oil pipeline for two more years until 2019. Enbridge blames the Minnesota Court of Appeals’ decision requiring an Environmental Impact Statement process be completed. However, that’s likely only part of the story. 

Pipeline companies are now biting the bullet and deferring new projects because of oil price and production uncertainties. Before Enbridge Energy and its partners spend $2.6 billion to $3 billion on each of the Sandpiper and Line 3 replacement oil pipelines through northern Minnesota, they might pause and see whether oil prices stay low and production declines. Markets matter.

The market price for benchmark West Texas Intermediate crude oil is low at around $34 per barrel, having fallen from the $100 per barrel range in 2011 through mid-2014. JP Morgan forecasts West Texas Intermediate crude oil to average $31.50 per barrel in 2016, and Goldman Sachs projects $40 per barrel. Analyst projections for 2017 through 2018 vary considerably. Low oil prices mean fewer rigs, less oil production, and less need for new pipelines. 

Bakken Shale Oil – Lower Prices, Fewer Rigs, Less Production

Bakken shale oil’s break-even prices are around $40 to $45 per barrel, which is above the current market price. Production costs vary depending on how rich the particular oil well is, the efficiency of the company’s operations, financing costs, and how close the rig is to infrastructure. Bakken shale oil must be transported by pipeline or rail to distant Midwestern or Texas refineries. 

The number of active drilling rigs in North Dakota is the lowest since July 2009. There are now only 35 active rigs in the Bakken area, down from 205 rigs in March 2012

According to North Dakota Department of Mineral Resources Director Lynn Helms, Bakken output fell to 1.15 million barrels a day in December 2015, down 6 percent below the all-time high in December 2014. Helms stated that oil production could fall to 1 million barrels per day by late 2016. Oil production and service companies are planning more layoffs, and there could be additional bankruptcies in June 2016 when banks often recalculate their debt limits for oil companies. 

Unless and until West Texas Intermediate oil prices reach around $45 per barrel, the rig count and oil production will continue to decline in the Bakken shale oil region, meaning less demand for oil pipelines such as Sandpiper and crude shipping by rail. For example, Whiting Petroleum just announced that it will suspend its Bakken shale oil drilling projects due to low oil prices

Canadian Oil Sands – New Production Stalled 

Canadian oil sands’ break-even prices for new production are around $80 per barrel for the “best of the best,” $90 to $100 per barrel for the “rest of the best,” and $100-plus per barrel for the “rest of the rest.” Canadian oil production likely will stagnate until global oil prices reach at least $80 per barrel. Some existing oil sands production operations have enormous sunk costs and might continue to operate as a long-term play as producers wait and hope for higher oil prices.  However, expect production to decline and no new oil sands production to start.

Less Oil Production Means Less Need for New Pipelines.

Financing for new North American oil pipelines is drying up until bankers and other investors see oil prices rise, leading to more production. That’s the market situation facing Enbridge for its costly new Sandpiper and Line 3 replacement oil pipelines.

Oil prices have dropped dramatically over the past 15 months. That changed reality has unavoidable market consequences for both oil production and the controversial pipelines.

Howard A. Learner is executive director of the Environmental Law & Policy Center, a public interest environmental legal advocacy and eco-business innovation organization headquartered in Chicago and focused on the Midwest. He is also a professor at the University of Michigan Law School and at Northwestern University Law School.