Big Profits Coming to Investors in Big Bakken Infrastructure

NEW YORK (TheStreet) -- The Bakken oil and gas shale play in North Dakota delivered over 1 million barrels of oil per day in May, the state says,  and the number is still heading up.

But producers aren't getting anything like the prices, or margins, of foreign suppliers, due to a shortage of pipeline capacity, according to the Congressional Research Service.

Pipelines would deliver oil to refiners for $5/barrel but producers are paying $10 to $20 per barrel to move it out by rail.  Rail is more flexible, with shorter contracts. Rail is also faster, meaning faster payments. Rail currently has over 60% of the market, according to the North Dakota Pipeline Authority.

Bakken Leak Puts Spotlight on Fast-Growing Crestwood Midstream

Export-Import Bank Issue Could Turn Wall Street Into Democrats

But the cost differences are driving a move toward pipelines.

While two pipeline new projects have been cancelled in the last year due to lack of demandEnbridge (ENB) has gotten regulatory approval for its Sandpiper line to Minnesota, which could go into service by early 2016. 

Energy Transfer Partners (ETP) thinks it can get a pipeline to Illinois done by late 2016, pending regulatory approval.  Iowa environmentalists oppose the plan but both parties' candidates for the U.S. Senate have spoken in favor of it, says the Des Moines Register

Enterprise Products (EPD) also wants to build a line that would run through Wyoming and Colorado. NaturalGasIntel.com says the "spread" between the price of Bakken crude and crude from Texas is already narrowing, to as little as $6.50/barrel, and should narrow further when the new lines are done.

For investors looking at Bakken infrastructure, the best play is the equity units of Energy Transfer, which trade under the symbol (ETE). They are up over 300% over the last five years and yield 2.5% in dividends on top of that.

The other players are also doing well. EPD is up 207% over five years, ENB is up 176%, and even the basic Energy Transfer shares, traded as ETP, are up 40%.

Energy Transfer moved toward building its latest line after a successful "open season" seeking long-term commitments of crude deliveries. And it's "open season" that is frustrating efforts to bring out more natural gas.

A unit of MDU Resources (MDU), for instance, put out an "open season" on a gas pipeline running across the state in March, but since its May 30 deadline passed the company has had no comment. MDU, which also runs small refineries and other "midstream" assets in the Bakken, has seen its shares rise 76% in the last five years.

Oil producers can afford the cost of running their product to market by pipe, by rail or even by truck, but at current prices of $4/mcf  natural gas pipelines are a tough sell. Pipeline operators like MDU need long-term contracts to justify their investment.

The North Dakota Pipeline Authority says that at the end of 2012 29% of the state's natural gas production was still being burned at the wellhead or "flared" due to the costs of getting it to market. 

Enbridge, which is building an oil pipeline, has no gas pipelines in the state nor does it have plans to build any, said spokesman Graham White. MDU did not return calls for comment.

What would bring more natural gas out of the Bakken? Higher prices. You may think $4/mcf is a lot, but Europe pays over three times that price, and Japan -- which gets its gas through LNG tankers like those Cheniere Energy (LNG) is hoping to use, pay even more.

At $100/barrel, oil competes directly with natural gas at $15/mcf and it can cost up to $4.15/mcf to liquefy and transport gas once it's at a terminal. Add in the cost of processing and transporting Bakken gas to the Gulf of Mexico, and you have a situation crying for higher prices.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

More from Opinion

Why Ether and Ripple -- But Not Bitcoin -- Prices Might Come Under Pressure Soon

Why Ether and Ripple -- But Not Bitcoin -- Prices Might Come Under Pressure Soon

Daily Chatter: Here's Where the Markets Stand After Tuesday's Beating

Daily Chatter: Here's Where the Markets Stand After Tuesday's Beating

3 New Investing Myths That Must Be Busted

3 New Investing Myths That Must Be Busted

Why a Global Stock Market Crash Is Coming

Why a Global Stock Market Crash Is Coming

Sears CEO Eddie Lampert Looks Like He Is Sucking Company Dry

Sears CEO Eddie Lampert Looks Like He Is Sucking Company Dry