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Providing coverage of Alaska and northern Canada's oil and gas industry
July 2009

Vol. 14, No. 29 Week of July 19, 2009

Damper on Asian link

Kinder Morgan, TransCanada and Canadian Natural Resources cool to idea that new markets for Canadian crude is an early option

Gary Park

For Petroleum News

Any thoughts that record shipments of Canadian crude oil from the Port of Vancouver might speed up the introduction of tanker traffic on a large scale to Asia have been downplayed by Kinder Morgan Canada.

Rival pipeline companies, Enbridge and TransCanada, agree that opening the door to alternative markets is a complicated matter and might still be several years away.

Even so, there has been a sharp rise in exports from Kinder Morgan’s Westridge Marine Terminal in Vancouver, with volumes hitting a record 134,000 barrels per day in March, before slipping to 55,000 bpd in May, which was still 167.7 percent above a year earlier.

Kinder Morgan anticipates an average 70,000 bpd will be loaded at its terminal.

The majority of volumes shipped by tanker from Kinder Morgan’s 300,000 bpd Trans Mountain pipeline from Alberta are destined for California, with some going to the U.S. Gulf Coast through the Panama Canal, some sent for refining in Chile and Asia taking up to 10 million barrels last year.

The company does not provide a detailed breakdown of what crude finishes up where, saying that is a matter for the shippers.

Expansion could come sooner

Ian Anderson, president of Kinder Morgan’s Canadian subsidiary, told a Calgary conference on unconventional oil the record movements from Westridge “very well might” lead to expansion of the terminal sooner rather than later.

“We’re moving to develop markets today and those movements are happening in increasing numbers,” he said.

Anderson said the rise in exports reinforces the prospect of a larger pipeline from Alberta to the British Columbia coast to new markets for Canadian crude from the oil sands and to reduce Canada’s dependence on the U.S. as its exclusive export destination.

Already, Kinder Morgan has almost doubled the size of tankers it loads at Westridge, moving from Panamax-size vessels to Aframax ships which are capable of carrying 650,000 barrels and yield savings of 50 cents per barrel for customers shipping to Asia. In the next few years, the terminal could start handling Suezmax-type tankers, which can hold 1 million barrels and trim $1.50 per barrel from shipments to Asia.

Those growing ship sizes and incremental additions to Kinder Morgan’s pipeline to Vancouver are consistent with supply-demand economics and are expected by the company to meet needs over at least the next decade.

The Trans Mountain system was recently boosted to 300,000 bpd from 225,000 bpd.

Kinder Morgan has two more incremental expansions available to the south coast of British Columbia, supporting deliveries to its marine exports as well as to Washington State refineries.

These are the cheapest additions, with 25 percent of the pipeline already in the ground, although there are no commercial agreements in place to make regulatory applications.

A spokesman for Kinder Morgan said the regulatory filings can proceed relatively quickly and will likely occur in lockstep with longer-term crude supply deals between Canadian producers and customers.

For now, Kinder Morgan is focused on attaining maximum capacity of 700,000 bpd at Westridge, unless customers make a case for using VLCC, very large crude carrier, tankers from the northern British Columbia port at Kitimat to access Asian markets.

The company has talked in preliminary ways about a 400,000 bpd, 450-mile extension of its Trans Mountain system to Kitimat, while industry sources have speculated it might hold an open season in 2010.

But the company’s latest view is influenced by the slowdown in production growth, combined with 1 million bpd of new pipeline capacity from Canada to the PADD II region in the Lower 48.

While keeping its options flexible, Kinder Morgan views Kitimat as a “great northern port option,” said Anderson, agreeing with Enbridge that Kitimat is viable and attractive.

Enbridge more enthusiastic

Enbridge has shown more enthusiasm for an earlier start at Kitimat, and may hold an open season later this year to test shipper backing for its planned 525,000 bpd Northern Gateway pipeline.

However, Al Monaco, Enbridge’s executive vice president of major projects, told the Calgary conference that the current supply profile no longer points to an immediate need for a project like Northern Gateway.

“This is certainly a forward-looking project,” he said. “It’s long term, based on getting to the markets over time.”

Monaco said Enbridge estimates it would take three years to build the pipeline and terminal facilities after a regulatory process taking as long as two years, pointing to a post-2015 startup for Northern Gateway.

On the more positive side, Enbridge estimates the premium paid for crude from the oil sands would generate $5-$6 extra profit for every barrel shipped to Asia rather than the United States.

“That right there is the critical issue,” he said. “It’s being able to access other markets to maximize price.”

Leverage with U.S. refiners

Russ Girling, TransCanada’s president of pipelines, said companies promoting projects such as Northern Gateway are hoping to use the threat of exports to countries like China as leverage to obtain better pricing terms from U.S. refiners.

He conceded that an alternative outlet would be positive by giving producers some negotiating leverage, but that goal would be offset by North America’s security of supply concerns and its eventual goal of energy self-sufficiency.

“Oil is a very strategic resource in North America,” he said. “That tension between what Canada wants to do from a producing perspective and what North America wants to do from a strategic perspective will be the tensions that we need to deal with over time.”

Girling said the U.S. government looks on Canada as a “domestic supply and would like to see that oil stay on the continent, if possible.”

To that end, he said TransCanada believes there is more to be gained from completing its Keystone pipeline link from the oil sands to the U.S. Gulf Coast.

Cocktails for Gulf Coast

John Langille, vice chairman of Canadian Natural Resources, echoed that thought, saying his company’s preferred destination for its heavy oil and synthetic crude is the Gulf Coast, which underscores why it has developed “cocktails” of heavy oil and bitumen blended with lighter oils to meet the specific needs of U.S. refineries.

He said pipelines such as Keystone are developing fresh opportunities for Canadian producers to compete against oil from Mexico and Venezuela.

“I think we will have a bit of a step change if we can get our oil down to the Gulf Coast,” Langille said. “The more oil we can push down there, the more our overall price differential (or discount to light oil) will decrease just because of the marketplace we’re selling into,” he said.

Wenran Jiang, research chairman of the University of Alberta’s China Institute, told the Calgary Herald there is a reluctance on the part of China’s authorities to do deals with Canada, adding he expects China will hold off on major investments until Canadian producers take steps to provide long-term stable supplies.

For that reason, he said plans for pipelines to tanker ports in British Columbia will “remain very conceptualized.”






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