Durango firm steps into Bakken oil

Oil-pipeline capacity problems could soon affect San Juan Basin

With oil production booming in North Dakota, so is demand for infrastructure to gather and carry that oil to markets across the United States. Several energy-industry giants are cashing in on the opportunity, but many smaller companies are edging into the market as well, including one based in Durango.

Saddle Butte Pipeline formed in 2008 and now works almost exclusively in North Dakota. The company gathers and moves oil drilled from the Bakken Shale, which, in recent years, has become a major player in the country’s domestic energy portfolio.

Since the company started, it has grown from fewer than 10 employees to 49 employees.

But the story doesn’t end there.

Production in the Bakken has become so successful, it has outstripped capacity to transport the crude oil to refineries. And that’s where Saddle Butte saw another opportunity.

It created a subsidiary, High Prairie Pipeline, earlier this year to construct pipelines that would ship crude oil from gathering points to larger pipelines that carry the oil to refineries.

“(Producers) identified very quickly (they) need an avenue to get their crude oil to market on the pipeline. That was the genesis for High Prairie,” said Greg Ward, general counsel for the company. “The pipelines that are out there are all fully constrained and are fully subscribed. There’s no capacity to move additional oil.”

But the tiny pipeline operator’s current $650 million pipeline project has been at a standstill, a victim of a new phenomenon among North Dakota energy producers: Increasingly fierce competition for pipeline space between U.S.-produced crude oil and imports from the Canadian oil sands. High Prairie’s 450-mile pipeline is planned to run from oil production in North Dakota to Minnesota where it will connect with a 1,900-mile interstate pipeline owned by Canadian pipeline giant Enbridge Inc. The mega-pipeline carries the crude oil, much of it from the Canadian oil sands, to refineries and a network of other pipelines.

But after initially indicating it had enough capacity to accommodate crude oil from the High Prairie pipeline, Enbridge set interconnection requirements that the smaller pipeline described as “unjust, unreasonable, and unduly discriminatory,” according to a complaint filed with the Federal Energy Regulatory Commission in May. The regulations essentially deny High Prairie’s request to interconnect, the company said. Meanwhile, the complaint argues, Enbridge allowed its own affiliates to do so. The complaint accuses Enbridge of violating the Interstate Commerce Act.

The company is hoping federal regulators will rule on the issue, and force Enbridge to allow High Prairie to interconnect, Ward said.

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For natural-gas producers in the San Juan Basin, problems with pipeline capacity are a distant memory, said Tom Dugan, president of Farmington-based Dugan Production Corp. Declining production means there is plenty of room in pipelines now.

But capacity issues could hit home if oil production increases in the basin, Dugan said.

“There is not a lot of excess capacity for oil any more out of here,” said Dugan, who has been in the natural-gas and oil industry here since the 1950s. “Oil could be a problem if things continue like they are right now.”

Gary Hanson, spokesman for Western Refining, said the company uses its own pipelines to transport crude oil to its refinery near Gallup, N.M. Though he couldn’t speak to other companies, Western still had some space in its pipeline, Hanson said. But depending on production “it could potentially be an issue, just not in the short term,” he said.

Several companies are aggressively exploring the oil potential in the Mancos Shale, a previously untapped formation that has exhibited potential with the advent of new horizontal drilling technologies.

In June, Encana Corp. announced its first test well in the shale yielded a 30-day initial production rate of about 440 barrels of oil per day, according to The Daily Times of Farmington. The well produces $40,000 per day at the current West Texas Intermediate price of $92 per barrel. Encana planned to drill 12 wells after those initial results, which many in the industry called promising. Dugan Production is partnering with Encana on the drilling project.

Encana USA spokesman Doug Hock said the company isn’t worried about pipeline capacity because production is so preliminary.