Canada pipeliners race to Gulf Coast

Turn to new markets, spurred by desire to shrink price differential between types of crude, fill vacuum created by Venezuela

Gary Park

For Petroleum News

The United States Gulf Coast beckons and Canadian pipeline companies are responding as the race to open a new market opportunity for Western Canadian crude moves into top gear.

The reasons were laid out earlier this year by Neil Earnest, vice president of the consulting firm Muse, Stancil & Co: “There is lots of market space for Canadian heavy sour crude barrels within the Gulf Coast and that market space may expand over time as production from Mexico and Venezuela drops off.”

To underscore his point, Earnest said the Gulf Coast is “far and way the largest demand center for heavy sour crude in the world.”

That’s music to the ears of Canadian heavy crude and oil sands producers, not least over recent weeks as they have seen the price spreads between light and heavy oils shrink to their smallest margin in well over two years.

And that has occurred during the traditional trough for heavy crude when the demand for bitumen for road paving is at its lowest point.

For March, Flint Hills Lloyd blend fetched C$51.77 per barrel, a gain of 10.6 percent from February, while Imperial Oil Bow River crude made a more modest gain to C$54.70.

That reduced the price differential to C$17.54 from C$22.26 in February, reflecting an increase of only 16 cents per barrel to C$69.22 that Canadian refiners Imperial, Petro-Canada, Shell Canada and Suncor Energy paid for light oil.

Over the first quarter, Flint Hills crude average C$45.79 and Imperial Bow River C$51.31 compared with C$39.76 and C$40.52 a year earlier. Over the same period, the price gap dropped 26 percent to an average C$21.88.

Heavy oils average 79 percent of benchmark light oil prices

Calgary-based investment dealer Peters & Co. estimated heavy oil prices averaged 79 percent of benchmark light oil prices in March vs. 63 percent a year earlier, while heavy crude moved to about 76 percent of the going world price in the first quarter from 59 percent in 2006.

Factors at work in the shift are a 46 percent increase in capacity at the Syncrude Canada upgrader to 350,000 barrels per day over the past year, combined with an additional 200,000 bpd of pipeline capacity beyond Chicago to the Gulf Coast as a result of two reversals — one by Enbridge on its Spearhead system from Chicago to Cushing, Okla., and one by ExxonMobil on a 66,000 bpd link from Illinois to Texas.

More help could be on the way, with Enbridge proposing an addition of 65,000 bpd to its 125,000 bpd Spearhead system, while BP is holding an open season to test response to a proposed reversal of a 100,000 bpd pipeline from Chicago to Cushing.

What’s next on the agenda is a push to build new pipelines once there is sufficient crude capacity from Western Canada to the Midwest, including some preliminary work on pipelines to New York, New Jersey and Pennsylvania.

Enbridge Chief Executive Officer Pat Daniel said earlier in April that the concern is Canadian heavy crude may already have saturated the Midwest market, giving added momentum to the case for pushing south in the U.S. and “hopefully further east in order to improve pricing.”

He said that even with the price improvement, Canadian producers are still losing $18-$20 per barrel — a number he believes should be $10-$12 based on quality.

To satisfy the appetite for Canadian crude in the Gulf Coast he said Enbridge might opt to buy existing assets rather than build a C$4 billion bullet line from the oil sands in northern Alberta to Texas.

Daniel said that route, covering a 2,000 mile system carrying about 400,000 bpd, is getting a serious look, as it is by privately held Altex Energy (which started exploring a US$3 billion system to move 250,000 bpd and is now pondering a 400,000 bpd project) and by Enbridge rival, TransCanada, which has its eye on the Gulf Coast, having put itself in a position to enter the Midwest with its Keystone project. Kinder Morgan is also in the thick of the contest to see who can line up shippers, end users and regulatory approvals.

Daniel said Enbridge would prefer to acquire established pipelines south of Cushing, even if it meant reversing some, but he sidestepped disclosing more of his company’s strategic thinking.

He said U.S. refiners have done their bit by modifying existing plants to process more Canadian heavy crude and offset the decline in Venezuela imports to 1.14 million bpd from 1.3 million bpd in 2004. Meanwhile, Canada’s total crude exports last year averaged 1.8 million bpd, beating out all other sources for top spot.

In addition to BP, Marathon is looking for feedstock to support a 180,000 bpd expansion of its 240,000 bpd Garyville refinery in Louisiana.

Gary Heminger, president of Marathon’s refinery operations has been quoted by Dow Jones as saying the proposed Altex pipeline could meet the need for lower-quality crude “such as that produced in Canada’s oil sands.”

Altex officials have said Marathon is one of several possible customers in the Gulf Coast as the company narrows down its choice of delivery points.

The objective over the next few months for Altex is to sign commercial contracts with shippers covering 15 to 20 years.

The importance of gaining markets in the Gulf Coast is reinforced by slow progress by Enbridge to overcome environmental and aboriginal issues and achieve a breakthrough with Asian refiners to proceed with the 400,000 bpd Gateway project that has already been stalled to 2014.