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Gulf Coast creates its own gulf TransCanada, Enbridge pursue different options to reach prized refinery market; backed by refiners, producers, Enbridge again looks to Asia Gary Park For Petroleum News
The U.S. Gulf Coast is the destination, regardless of an Enbridge flirtation with Asia. The point at issue is when and how to connect the Alberta oil sands with the world’s largest refining region.
And, as they do so often, that’s where TransCanada and Enbridge, the two Canadian pipeline giants, part company as they pursue massive capital spending plans (TransCanada C$17 billion and Enbridge almost C$12 billion), with their eyes on the ultimate prize of accessing the Gulf.
They have fundamental disagreements over how best to ship Canadian crude to the Gulf and whether Asian markets offer a viable alternative to Canadian producers.
TransCanada thinks the shortest route is a straight line, while Enbridge figures its best journey is through Portland, Maine, for the time being, with a side trip to Asia.
Their different strategies came even more sharply into focus July 31 when both held conference calls after releasing their second-quarter earnings.
Enbridge, in the same month that it stalled progress on its proposed 400,000-barrel-per-day Texas Access pipeline from Illinois to the Gulf, made a decisive move to rekindle its five-year Gateway proposal to open up Asian markets by 2014 for crude derived from the oil sands.
TransCanada, on the other hand, was emphatic that the Gulf is its preferred market over any other choices, notably the Pacific Rim.
Enbridge has new partners, unnamed now, for project to east The Gateway project is clearly back in favor with Enbridge now that it has obtained C$100 million from Asian refineries and Western Canadian shippers to fund the regulatory process, which is expected to see an application filed early in 2009.
Enbridge Chief Executive Officer Pat Daniel was especially upbeat in telling analysts that support for the 400,000-bpd Gateway system has “never been higher” and now embraces “broad-based interest” from Asian refiners in the Singapore to Japan region.
He said the new partners want the scheme to advance as “quickly and promptly” as possible.
Although bound by confidentiality agreements for now, Daniel told the analysts they will be “impressed” when the identities of the partners are disclosed.
He gave no indication whether the Chinese are back in the picture after PetroChina declined to extend an agreement with Enbridge to aggregate 250,000 bpd for Gateway and possibly take a 49 percent equity stake, bitterly attacking the Canadian government and producers in the process.
It is not clear what has changed in the interim, but Daniel said Canadian producers clearly recognize the “value of having access to offshore export markets, primarily in the Far East, to create pricing tension around their crude.”
If Gateway does proceed it will generate an “ongoing bid for (Canadian) crude which will improve netbacks for our customers,” he said.
Daniel portrayed Gateway as “primarily a pricing play (giving producers) the flexibility to move around.”
He conceded Gateway — involving a 690-mile pipeline from Alberta to a deepwater tanker terminal at Kitimat on the northern British Columbia coast — will cost far more than its original estimate of C$4.2 billion, although a new estimate will not be available until 2009.
Daniel also said confidence has “gone up significantly” within Enbridge that it can overcome opposition from First Nations and environmentalists, who have previously threatened to take legal action to stall progress on the pipeline.
As well, he argued Gateway is “very much in Canada’s best national interests,” making an indirect reference to political and nationalist concerns (including some from the United States) over any plans to export Canadian crude to Asia.
TransCanada favors Gulf TransCanada Chief Executive Officer Hal Kvisle said “multiple” projects aimed at opening up markets in the Pacific Rim — with Enbridge and Kinder Morgan the only two to disclose plans — are a “good plan” for producers seeking a spot or base market, but TransCanada rates the Gulf as the preferred market.
As for California, he said TransCanada has rights of way to the state, but won’t try to exploit them until it “sees evidence of a stable market over the longer term,” adding California poses a “bit of uncertainty right now” as it contemplates banning fuels from “dirty oil” such as the oil sands.
What TransCanada doesn’t seem concerned about is that signs of oil sands producers extending timelines for their projects coupled with delays in building planned upgraders will continue indefinitely.
The company is optimistic that even if there is a lull in development, new waves of growth will occur in 2014-15 and 2018-20 (when the Canadian Association of Petroleum Producers forecasts a four-fold increase in output to 4.5 million bpd), with the Gulf Coast expected to absorb the lion’s share of the new volumes.
And, with the Midwest market limited in terms of absolute growth, Kvisle is resolved to make his company the “preferred shipper” to the Gulf.
Keystone being built Those hopes are pinned on the Keystone pipeline (a 50-50 joint-venture with ConocoPhillips) which is now under construction at a cost of US$12.2 billion and is scheduled to be phased in from 2009 to 2012.
To date, Keystone has binding contractual commitments from shippers for 830,000 bpd for an average term of 18 years and plans capacity in the current construction phase of 1.09 million bpd, expandable to 1.5 million bpd.
The undertaking incorporates plans for expansion to the Gulf at a cost of US$7 billion, with an in-service date of 2012. Shipper response will be tested during an open season that closes Sept. 4.
TransCanada estimates Gulf Coast refinery demand for Western Canadian crude will grow as Mexican supply shrinks and Venezuela supply remains at risk.
Kvisle estimated 600,000-700,000 bpd of Keystone’s initial peak of 1.09 million bpd could end up in the Gulf through a “low-cost expansion of Keystone” that will give TransCanada a “significant leg up on our competitors” who include Enbridge, Kinder Morgan and Altex Energy.
He said any spare capacity on Keystone is “a good thing,” because it can be accessed more cheaply than by embarking on new pipeline construction.
Enbridge 2/3 of way to Gulf Daniel believes Enbridge is “in by far the best position” to deliver crude to the Gulf because its pipeline network is already two-thirds of the way there.
And he rates Texas Access as the “most economical route” to the region.
But for now Enbridge has chosen an interim option in response to a slow ramp up of heavy oil volumes in Western Canada.
Its C$350 million Trailbreaker project involves expanding Enbridge’s mainline and reversing a portion to move 230,000 bpd to Portland, Maine, then shipping a portion by tanker to the Gulf.
Al Monaco, Enbridge’s vice president of major projects, said a month ago that once volumes seeking the Gulf exceed the capacity of Trailbreaker, Enbridge will be ready to push ahead with Texas Access, which could be operational by 2014, two to three years behind the initial timetable.
Ian Anderson, president of Kinder Morgan Canada, agreed that Gulf access remains at the top of everyone’s list, but his firm is certain the next wave of pipeline requirements is to the North American West Coast to serve California and Asia.
Although he expects some crude to move east, Kvisle has no interest in the Atlantic seaboard, where it would compete directly against crude coming from Norway “at a relatively cheap shipping cost.”
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