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Spearheading new outlets: Oil moving south
Gary Park For Petroleum News
Canadian crude is flowing to its most southerly U.S. market, with the start-up of Enbridge’s Spearhead pipeline from Chicago to Cushing, Okla., and will soon find its way to Houston.
Now there is also talk of a new grade known as Western Canadian Select — a blend of 19 Alberta heavy crudes — being listed on the New York Mercantile Exchange.
The Spearhead line, originally built to deliver crude from Texas to the U.S. Midwest, has struggled to operate as the once-prolific fields of Texas went into decline.
Enbridge bought Spearhead from BP in 2003 and invested US$190 million to reverse the system, which has initial capacity of 80,000 barrels per day (10 year contracts have been secured for 60,000 bpd) but is expected to rise to 125,000 bpd, with plans under way to boost capacity to 190,000 bpd.
Although the initial deliveries involve only heavy crude, Enbridge is open to carrying synthetic crude. Transit time of 47 days The oil being delivered to Cushing enters the Enbridge mainline system at Edmonton and travels more than 1,500 miles to Chicago before entering Spearhead and moving another 625 miles — a transit time of about 47 days.
Enbridge Chief Executive Officer Pat Daniel said that opening up Cushing gives producers an option and ensures that saturating the U.S. Midwest does not negatively impact prices for Canadian crude.
He said crude from Alberta is “slowly marching south. This is a big step … a first initiative to get Canadian crude south of the bottleneck market in Chicago.”
He said the ribbon-cutting March 2 “marks the beginning of a new era of North American crude supply,” noting that Canadian exports could double in the next decade if attractive markets could be established.
Daniel said refiners in the southern U.S. are eager to receive more Canadian crude because it is a secure source and it is cheaper than heavy oils from Venezuela and Mexico. Volumes can affect prices He said that although the volumes reaching Cushing are small compared with total Canadian exports they can affect prices.
“Often it only takes a small volume or a marginal barrel in order to be able to dramatically improve the pricing,” he said.
Current heavy oil is trading at US$30 per barrel less than the US$60 being paid for light crude.
Daniel is confident Spearhead will narrow the differential, but he is not sure by how much.
Steve Laut, president of Canadian Natural Resources, said new markets in Oklahoma and Texas would “ultimately close the gap between the prices we see in Chicago versus areas in the Gulf Coast.”
Enbridge noted that heavy oil recently fetched US$10 more per barrel in Cushing than Chicago, more than offsetting the transportation cost of US$1.50 per barrel between Chicago and Cushing.
Steven Kelly, a Purvin & Gertz analyst, said in a recent report that Spearhead will give refiners in the U.S. Midcontinent “a measure of flexibility they haven’t had before.”
More could come if TransCanada moves ahead with its 450,000 bpd Keystone pipeline from Alberta to Patoka, Ill. — a system that could be operational in 2009.
Enbridge has projects on the table worth about C$12 billion to extend its reach to U.S. and Asian markets. Cushing doorway to Gulf Cushing, which has refining capacity of only 500,000 bpd, is the doorway to the 6.5 million bpd Gulf Coast refining region, which Canadian crude will pass through within a few months.
Enbridge carries 63 percent of all Canadian oil exports to the U.S. in 70 different blends.
Experts have been warning for years that Western Canadian crude producers must gain access to more markets if they are to ease the painful price spread between bitumen blends and light oil.
Michael Lovett, president of Muse Stancil, told an oil sands forum last year Alberta bitumen producers were being forced to sell most of their exports into a flooded markets consisting of only half a dozen refiners in the U.S. Midwest.
He suggested bitumen prices might have improved if volumes could have been shipped westward to alternative buyers in the Pacific basin.
Stephen Fekete, a principal with Purvin & Gertz, said the differential was “likely to remain wide,” but might shrink if refiners in the Midwest and Rocky Mountain states proceeded with proposals to build new cokers capable of cracking bitumen blends.
The new Western Canadian Select blend currently amounts to 250,000 bpd with an average 19-21 API.
Nymex officials say they are open to meeting customer needs by establishing a new future contract if they are shown to be viable, but for now the possibility is only in the research stage.
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