The sense of urgency among Canadian governments and oil producers facing a crude transportation bottleneck and the looming prospect of shut-ins has prompted one provincial premier to join 10 U.S. state governors in urging President Barack Obama to end procrastination and approve TransCanada’s Keystone XL pipeline.
“The energy relationship between the United States and Canada is vital to both our countries. It is an interest we share, transcending political lines and geographic boundaries,” the leaders said in a letter to Obama, hoping to gain the president’s attention as he embarks on his second term.
Noting that U.S. oil imports from Canada could almost double within seven years to 4 million barrels per day, Saskatchewan Premier Brad Wall said the Keystone XL pipeline “could also provide the critical infrastructure required to transport growing U.S. domestic production from the Bakken shale region to market.”
In a major development Jan. 22, Nebraska Gov. Dave Heineman approved the revised route for the pipeline, dropping his earlier opposition to the project.
He said TransCanada would provide evidence that it is carrying $200 million in third-party insurance to cover any cleanup costs from leaks.
The pipeline is designed to carry 830,000 bpd from the Alberta oil sands to U.S. Gulf Coast refineries, picking up Bakken production from Saskatchewan and North Dakota along the way.
Along with Wall, the Republican governors of Arizona, Idaho, Kansas, Nevada, North Dakota, South Dakota, Oklahoma, Texas, Utah and Wyoming were signatories to the letter.
Names not on letterMontana’s newly elected Gov. Steve Bullock said he intends to write his own letter, while Alberta Premier Alison Redford — whose province would be the major financial beneficiary of the pipeline — bypassed the chance to add her name to the letter.
A spokesman for Redford said: “It’s not about any one letter. We welcome this letter as it supports (Redford’s) longstanding efforts to open new markets for Alberta oil.”
However, Heineman, whose state has generated the strongest opposition to the pipeline, was also a notable omission from the signatories, pending a resolution of TransCanada’s rerouting of the pipeline to avoid Nebraska’s environmentally sensitive Ogallala Aquifer.
A new report by the Nebraska Department of Environmental Quality concluded that any pipeline ruptures would be “localized,” cleaned up by TransCanada and pose no threat to the aquifer — a finding that was scorned by a landowners’ group.
A decision by the U.S. State Department on Keystone XL has been expected this quarter, although some observers expect further delays, with former Alberta premier Ed Stelmach doubts Keystone XL will be approved, if at all, this year.
Effectively shelved by the Obama administration for the past year, Keystone XL is the most immediate hope of relief for Canadian oil producers who are anxious to gain access to new markets.
Arguments for pipelinesRick George, former chief executive officer of oil sands giant Suncor Energy, has taken a high-profile public role in hammering home a constant refrain — that more pipelines are vital to the petroleum industry’s health and Canada’s economic well-being.
The price spread between Alberta’s oil sands bitumen and U.S. conventional crude is ”serious” and should remind Canadians about the dangers of relying on basically one export customer, he said.
Martin King, an analyst with FirstEnergy Capital, agreed that the squeeze on pipelines and delays in retooling U.S. refineries to handle heavier crudes are forcing Canadian producers to think about shutting in some production.
The trigger point results from the dramatic plunge in prices for Western Canada Select heavy blend, which is now hovering around $50 per barrel, less than half the price for international benchmark Brent crude — a discount that King warns could stretch over a long period.
He said traditional heavy oil production is likely to be hit first as that sector sits on the fringe of prices in the $45-$50 per barrel range that is needed to generate positive cash flow.
King said higher-volume projects that use enhanced recovery methods and oil sands operations that use steam-assisted gravity drainage can probably hang in until prices fall below $30 per barrel and remain there for several months.
Those projects are not easily shut down because of the need to keep steaming the reservoir to force the viscous heavy crudes to flow to the surface.
Pressure on pricesThe shortfall in takeaway capacity from Canada and a delay in adding a 120,000 barrel-per-day unit to boost capacity at BP’s 337,000 bpd refinery at Whiting, Ind., contribute to the accumulating pressure on realized prices for both Canadian heavy and tight oil, said Chris Feltin, an analyst at Macquarie Research.
And it makes little difference that Canada is the largest source of U.S. oil imports at 2.5 million bpd.
The challenges saw the Toronto Stock Exchange’s energy index drop 5.3 percent in the final quarter of 2012, with Penn West Petroleum posting a 22 percent decline in its share value, MEG Energy down 19 percent and Canadian natural Resources off 7.5 percent.
A continuation of the trend points to a “really ugly” first quarter said Andrew Potter, an analyst with CIBC World Markets.
The fist glimmer of hope is the 50,000 bpd of new space Enbridge is scheduled to add to its Line 5 from Superior, Wisconsin, to Sarnia, Ontario, in March.
Marcel Coutu, chief executive officer of Canadian Oil Sands, the largest partner in the Syncrude Canada oil sands consortium, told an investment conference earlier in January that he anticipates a “couple of tough years” ahead.
George said he is counting on the northern segment of TransCanada’s Keystone XL pipeline getting U.S. administration approval and the reversal of Enbridge’s Line 9 to open the Montreal refining market to Western Canada and U.S. light crude also proceeding, and providing some pricing relief. But that won’t be enough.
“We need one new oil line and two natural gas lines to the (British Columbia) coast for Asian customers,” he said.
Taking direct aim at the opponents of new oil sands pipeline capacity across British Columbia, George said that “if we think about what is good for this country and not what is best for each individual in it, that is important.
“The infrastructure we need is not risky and not terribly complex and we should be putting it in to protect the Canadian standard of living.”
He welcomed “civil conversations” with people who do not hold entrenched views, urging them to “get out of the trench.”
Pricing outlook bleakAlberta Energy Minister Ken Hughes took an even bleaker view of the pricing outlook than George, saying “it’s entirely possible that this will take a much longer cycle to work its way through. So I’m not thinking we’re facing just a couple of years of pressure on differentials.”
“It’s going to take time to build pipelines. Do not assume that we will be bailed out by another boom. That is a very dangerous assumption,” he said.
Alberta Finance Minister Doug Horner added to the dismal outlook by noting that provincial auctions of exploration rights and royalties from conventional oil will add to Alberta’s painful budget troubles, hinting at a deficit-burdened budget on March 7, while noting that his province’s returns from natural gas royalties have slumped to C$1 billion in the current fiscal year from C$8 billion five years ago.
He told a business luncheon Jan. 21 that the widening price gap will put Alberta more than C$3 billion below its revenue projections in the fiscal year that ends March 31, shattering the government’s hopes of collecting C$11 billion from its resources, and jeopardize projections of C$10 billion in bitumen revenue in fiscal 2014-2015.
“It’s not pretty,” Horner said. “The price differential has widened out during a period when seasonality would normally indicate we would get a better result. We did not.”