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Marathon Petroleum Stepping Out of Sandpiper Pipeline; Joining Enbridge in Bakken System Project

Marathon Petroleum Corp. (MPC) and Enbridge Energy Partners LP (EEP) plan to end their transportation services and joint venture (JV) agreements for the Sandpiper Pipeline Project, a proposed 612-mile, $2.6 billion oil pipeline that would transport light crude oil from the Bakken Shale and Western Canada to Wisconsin, the two companies said.

MPC also plans to liquidate its indirect ownership interest in North Dakota Pipeline LLC, which would effectively end its commitment to fund construction costs for the Sandpiper project. As of June 30, Marathon had contributed $301 million for Sandpiper construction costs. The closing of an investment in the Bakken Pipeline system and MPC's resulting exit from the Sandpiper pipeline project would result in an impairment review of the carrying value of MPC's investment in North Dakota Pipeline in 3Q2016 that could result in a charge to impair MPC's investment in the project, the company said.

Marathon and Enbridge also said they had agreed to form a JV to invest in the Dakota Access Pipeline (DAPL) and the Energy Transfer Crude Oil Pipeline (ETCO), collectively referred to as the Bakken Pipeline system. The new JV would acquire a 49% equity interest in the holding company that owns 75% of the Bakken Pipeline system (Phillips 66 owns the other 25%) from an affiliate of Energy Transfer Partners LP and Sunoco Logistics Partners LP. Enbridge and Marathon Petroleum would indirectly hold 75% and 25%, respectively, of the JV's 49% interest in the holding company of Bakken Pipeline.

Enbridge said the purchase price of its effective 27.6% interest in the system is $1.5 billion, and Marathon said it would own a 9.2% indirect interest for its $500 million investment. Closing of the transaction is subject to certain conditions and is expected to occur in 3Q2016.

DAPL is a new 30-inch diameter pipeline from the Bakken/Three Forks production area in North Dakota to market centers in Patoka, IL, that is expected to initially deliver more than 470,000 b/d of crude oil, with the potential to be expanded to 570,000 b/d. The construction of terminals began in January and mainline pipeline construction began in May, Enbridge said. ETCO is a converted natural gas pipeline from Patoka to the Sunoco Terminal in Nederland, TX. The pipeline consists of 62 miles of new 30-inch diameter pipe, 686 miles of converted 30-inch diameter pipe, and 40 miles of converted 24-inch diameter pipe. Both DAPL and ETCO are expected to be ready for service by the end of 2016.

The Sandpiper project is still on Enbridge's radar. The company said it "continues to believe the Bakken region is a highly productive and attractive basin, which has significant crude oil supply growth potential that will require additional pipeline capacity in the future. The scope and timing of the Sandpiper project will be evaluated during the quarter to ensure that it is positioned to meet the growing need for pipeline capacity while offering customers competitive tolls and strong netbacks. Additionally, in conjunction with a termination of the Sandpiper joint venture agreements with Marathon Petroleum, Enbridge will retain 100% ownership in its legacy North Dakota system, “which is one of the most competitive outlets available to producers in the state."

MPC signed on as an anchor shipper for Sandpiper in 2013 (see Shale Daily, Nov. 26, 2013). Some early phases of the project were hampered by permitting delays (see Shale DailyFeb. 4, 2015Oct. 2, 2014).

The Bakken Pipeline system, slated to be in service by the end of the year, is expected to deliver in excess of 470,000 b/d of crude oil from the Bakken/Three Forks production area in North Dakota to the Midwest through Patoka and to the Gulf Coast.

The Sandpiper Pipeline project "probably shouldn't have gone as far as it went," and the Bakken Pipeline system won't be taking over all production coming out of the play, according to David Dehaemers, CEO of Tallgrass Energy Partners LP, a midstream competitor in the Bakken.

"I think that the consolidation that's taking place with the Bakken pipeline [system]...makes the most logical sense relative to infrastructure, et cetera. I think that, again like one of the big picture things that I think sometimes people are failing to understand is that the Bakken is a fairly big play," Dehaemers said during a 2Q2016 Tallgrass earnings conference call with analysts Thursday (see related story).

Tallgrass gets as much as 200,000 b/d from the Bakken, and the Bakken Pipeline system isn't going to sap all the capacity out of the area. "Not every barrel in the Bakken wants to go to Patoka or wants to go to Nederland.

"...[W]e know they have contracts, all of which is good for the country's infrastructure, but it's not going to sap everything dry."

Marathon’s and Enbridge's joint-venture investment in the Bakken Pipeline system is subject to certain closing conditions, and is expected to close in the 3Q2016.

Enbridge recently reported 2Q2016 earnings of C$301 million (33 cents/share), compared with C$577 million (68 cents) in 2Q2015.

NGIrecently completed an in-depth report on the Bakken and how it is handling the current low-price commodity environment. For more information on Breaking Bakken: What Prices Will it Take to Awake the Sleeping Giant?, and other reports from NGI, visit www.naturalgasintel.com/ngi-special-reports.

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