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August 2009

vol. 14, No. 34 Week of August 23, 2009

TransCanada, Enbridge going at it again

Pipeline giants lock horns over rival attempts to establish a ‘bullet’ crude oil pipeline from Alberta to U.S. Gulf Coast

By Gary Park

For Petroleum News

When the National Energy Board convenes on Sept. 15 it could be adjudicating another brawl between TransCanada and Enbridge, Canada’s pipeline heavyweights.

They just can’t seem to get along.

In the preliminary skirmishes, the two are sharply at odds over the cheapest way to get heavy crude from Canada into the United States, and all the way to the Gulf Coast refining market.

Just as the contenders posture and mouth off at the weigh-in before a title bout, the two companies have displayed a degree of animosity and testiness that is unusual in regulatory filings.

This time it’s all about TransCanada’s application for the Canadian segment of its proposed Keystone XL — a bullet line from Alberta to the Gulf Coast, with capacity for 700,000 barrels per day, starting in 2012.

Expansion of Keystone

The XL system is an expansion of TransCanada’s base Keystone line, which has contracted volumes of 380,000 bpd (83 percent of commercial design) from Hardisty, Alberta, to Patoka/Wood River, Ill., and Cushing, Okla.

Keystone is due on-stream in 2010, about the same time as Enbridge’s Alberta Clipper system from Hardisty to Superior, Wis., adding 450,000 bpd to Canada’s export capacity.

Keystone XL has gained the jump on a proposal by Enbridge to establish the first direct link from Alberta to the Gulf Coast, but Enbridge shelved its plans when it was unable to attract enough shipper support.

Now that the growth rate for Western Canadian crude production is being scaled back and Keystone and Alberta Clipper are nearing completion, additional export capacity will not be needed until several years after 2012, Enbridge said in an NEB filing.

It said the US$7 billion Keystone XL line would “create an unnecessary and unprecedented level of excess pipeline capacity” from Western Canada to U.S. markets and could raise shipping tolls by C75 cents per barrel in 2013.

Assuming Keystone XL could deliver its contracted volumes of 380,000 bpd, Enbridge said volumes on its own network would decline, raising tolls by C$315 million in 2013 from Edmonton, Alberta, to Chicago.

If either the base Keystone pipeline or Keystone XL were to carry more than their contracted volumes, the toll impact could be even greater, Enbridge said.

Capacity would exceed exports

The Canadian Association of Petroleum Producers last supply forecast targeted crude oil exports from Western Canada of 2.35 million bpd in 2013.

With Keystone XL and other pipelines factored in, export capacity would be almost 4 million bpd, placing excess capacity at 1.65 million bpd.

While a “certain level of excess capacity is normally advantageous to oil producers,” Enbridge said that benefit is lost when the “cost of capacity outweighs the netback benefits that can be achieved.”

Enbridge endorsed the development of pipeline capacity to the Gulf Coast, but questioned whether Keystone XL would be in the overall Canadian interest because of the dramatic change in the economic outlook over the past year when the open season was held for the expansion.

The level of tension between the two companies was reflected in Enbridge’s disclosure that unsuccessful efforts were made earlier this year to use existing pipelines in Canada as part of Keystone XL to benefit all crude oil shippers.

But those talks with CAPP stumbled at the initial stage.

Enbridge said it is still willing to offer long-term service on its system from Hardisty to Gretna, Manitoba, charging a toll to Keystone that would be competitive with Keystone’s proposed toll for its committed shippers in Canada.

It said that could reduce capital costs on Keystone XL by US$2 billion and provide a toll saving on the Enbridge system of about C35 cents per barrel.

Keystone: no formal proposal

Keystone said it had not received a formal proposal from Enbridge, or any other party, to use capacity on the Alberta Clipper system, adding 450,000 bpd of heavy crude capacity from Hardisty to Superior, Wis., saying it understood Enbridge was still ready to “propose and pursue competing projects” to move Canadian crude to the Gulf Coast.

Keystone said it was open to any proposals to resolve “key threshold issues,” but, since none had been received, it considered the idea “defunct.”

The marketing and supply division of Valero Energy said the Keystone XL “bullet line” limits Valero’s exposure to “pricing volatility during transit,” while the absence of any origination points in the U.S. improves the likelihood of crude being shipped directly from Hardisty to Port Arthur, Texas.

In a supplementary report to the Keystone application, consulting firm Purvin & Gertz said Canadian producers could benefit from narrower differential and stronger prices by shipping to the Gulf Coast.

It estimated producers could collect increased revenues of US$1.8 billion-$3.4 billion in 2013 if Keystone XL reduced oversupply of heavy crude and prices strengthened.






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