Is the Bakken Turning Sour?

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Enbridge Energy Partners (NYSE: EEP  ) has been in a bit of a battle with Plains All American Pipeline (NYSE: PAA  ) over the levels of hydrogen sulfide that's in the crude oil being delivered to its rail facility in the Bakken. The company is seeking to reject crude oil that contains more than five parts per million of the potentially deadly gas. This is after the company found extremely high concentrations of the gas in one of its crude oil tanks in North Dakota. The level of hydrogen sulfate hit 1200 parts per million which is a very potentially dangerous level.

Enbridge's proposal to reject crude with higher levels of the gas has not only caused it to fight against Plains, but it's not made producers like Marathon (NYSE: MRO  ) and Hess (NYSE: HES  ) happy either. Those two companies, as well as other Bakken operators, could be forced to shut down oil and gas production until a new form of transportation can be secured. Both companies, along with Plains, have filed with FERC to slow down the pace of Enbridge's plans to reject oil with high concentrations of hydrogen sulfide.

You can't blame Enbridge for wanting to protect its employees from potential exposure to the deadly fumes. What's interesting though is that this dispute could be pointing to a bigger issue with the Bakken. One of the reasons why the oil flowing out of the Bakken has been so highly prized is because it's known to contain low levels of sulphur. This sweet crude oil is easier to refine than heavier, sour crude.

Source: Marathon Oil 

Finding elevated levels of hydrogen sulfide could mean that some areas of the play are more sour or it could mean that play is becoming sour. According to the Society of Petroleum Engineers, some of the reservoirs from the Bakken formations have been observed as souring. There are several potential causes including fracturing, underground mineral migration, and bacterial action.

What might happen in the future is that companies operating wells with more sour oil and gas could be forced to install separation equipment. This equipment would add to the cost, but it would remove the hydrogen sulfide. Another option would be to send the oil and gas on a dedicated pipeline to a treatment plant. While both options would add to the cost of production, if the Bakken proves to be souring, oil and gas companies like Hess and Marathon might need to explore these options in order to continue producing.

If the souring of the Bakken becomes more widespread it could have a big impact on the profitability of higher-cost producers like Kodiak Oil & Gas (UNKNOWN: KOG.DL  ) . Because it costs the company $10 million on average to drill a well, its rates of return are already lower than its peers in the $8 million per well range. Additional costs from hydrogen sulfide mitigation equipment or special pipelines will slow growth and crimp profits. 

While the problems don't appear to be widespread, it's an area to watch. It goes without saying that the safety of employees and protecting the environment should remain top priorities for all companies involved in the Bakken. However, those priorities come at a cost and some companies can afford that cost better than others. As an investor, keep a close eye on costs, because if the oil is souring then costs will likely increase. 

This is especially true for Kodiak Oil & Gas investors. The company is a dynamic growth story – it offers great opportunities, but with those opportunities come great risks. One of those risks is its high well costs, so before you invest in Kodiak, let us help you with your due diligence. To find out whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.

Read/Post Comments (4) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2013, at 11:48 PM, prginww wrote:

    I am a trucking company that hauls crude from the oil field to injection points. I don't believe

    The fields are turning sour. Almost all the well that have been drilled during this boom have all been sweet oil. It's mostly the wells that have been producing since the eighties that have some H2s. The problem is that enbridge is getting in on the rail takeaway. We may put oil in at Alexander then it is transported Via pipeline to Berthold then it is put on rail. The rail does not allow any hydrogen sulfied in their shipments. With 80% of the oil going rail I see enbridge trying to cash in on the rail somehow. They were the only game in town for a long time now there is competition and its there way of keeping revenue. We are being told July will see a dramatic increase of pipeline deliveries. I see this as a byproduct of the spread between WTI and Brent. It has to be around $20 to make sense. And with it being down to $9 it no longer economical. There will always be rail just because the ability to send it to places that the pipeline cannot.

  • Report this Comment On June 05, 2013, at 3:55 AM, prginww wrote:

    They better find the source of the H2S. When concentrated enough, it first kills the sense of smell and then kills.

  • Report this Comment On June 05, 2013, at 7:35 AM, prginww wrote:

    @crudehauler - Thanks for your insights into what you are seeing on the ground in the Bakken!


  • Report this Comment On June 05, 2013, at 11:59 AM, prginww wrote:

    This is old news. NO impact

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