The race to carry burgeoning new crude volumes from the Bakken and Alberta’s oil sands to the prized market on the Texas Gulf Coast has been portrayed as a winner-take-all contest between Canadian pipelines TransCanada and Enbridge.
But not in the eyes of the rival chief executive officers, TransCanada’s Russ Girling and Enbridge’s soon-to-retire Pat Daniel.
They insist there’s ample demand for all of the biggest pipeline proposals of the past generation in North America — TransCanada’s Keystone XL, regardless of the political uncertainties surrounding the full trans-national pipeline expansion from Alberta to Texas, and Enbridge’s combination of its Seaway and Flanagan South plans.
Even so, the Calgary-based giants have been actively trying to outflank each other in rounding up shipper support for their megaprojects and, in TransCanada’s case, trying to cling to the backing it previously received for XL.
Analysts are warning that crude from the Bakken, regardless of the modest relief valve offered by railroads, barges and tank trucks, may quickly run out of shipping capacity on both sides of the Canada-U.S. border. Oil sands production is expected to add 600,000 barrels per day, reaching 2.2 million bpd, colliding with the rapid rise in Bakken volumes towards 1 million bpd.
Opinions differ on when
Greg Stringham, vice-president of markets at the Canadian Association of Petroleum Producers, said his organization sees tightness coming in 2014 or 2015, a view shared by Steve Fekete, managing consultant at Purvin & Gertz.
Vern Yu, vice-president of business development at Enbridge, thinks more capacity won’t be needed until the 2015-2017 period.
He estimates that about 300,000-400,000 bpd of unused capacity can be immediately accessed on Enbridge’s 2.5 million bpd Mainline system, which extends as far east as Sarnia, Ontario, and south to Cushing.
Additional space is also available on two more Enbridge systems — the 450,000 bpd Alberta Clipper pipeline from Alberta to Superior, Wis., and the 796,000 bpd Line 4, which carries heavy crude from Alberta. (See CAPP map of all Canada and U.S. crude lines on page 23 of this issue.)
In addition, Yu said Enbridge could convert its 390,000 bpd Line 3 from light and synthetic crude, condensates and some light sour crudes to run heavy crude.
Other lines that are running at capacity are TransCanada’s original 590,000 bpd Keystone pipeline and Kinder Morgan Energy partners’ 280,000 bpd Express-Platte system into southern Illinois.
Bump in the road: Obama
Until a year ago, it seemed the $7 billion Keystone XL project would sail through the regulatory and political stages, offering 830,000 bpd of new capacity by 2013 and drawing about 200,000 bpd from the Bakken.
Then the best laid plans came unglued as political infighting in Washington, D.C., and opposition from environmentalists and landowners in Nebraska, tipped the balance, with the State Department denying the necessary trans-border permits and President Barack Obama agreeing that TransCanada should have to find a new route through Nebraska. That pushed a final decision beyond the November presidential election.
Enbridge buys 50% of Seaway
For TransCanada, the spotlight quickly shifted from environmental obstructionism to competition. Enbridge seized the initiative by purchasing ConocoPhillips’ 50 percent stake in the Seaway pipeline from the Gulf Coast to Cushing, announcing plans with joint owner Enterprise Products Partners to reverse the flow.
The line is now scheduled to start delivering 150,000 bpd by late May and increasing to 400,000 bpd in early 2013 with additional pumping capacity, and displacing Enbridge’s earlier plans to build the 800,000 bpd Wrangler pipeline along a similar route to Texas refineries in Houston and Port Arthur.
The Enbridge-Enterprise partnership followed that move by announcing in late March they would add another 450,000 bpd to Seaway as part of its Gulf Coast Access projects, with an in-service date of mid-2014, after lining up enough binding commitments from shippers covering terms of five years to 20 years.
Flanagan South, Spearhead
Enbridge also said it would move forward with construction of its Flanagan South project from Flanagan, Illinois, to Cushing, completing the parallel 190,000 bpd Spearhead line.
The wholly-owned Flanagan South line is designed to offer initial capacity of 585,000 bpd by mid-2014, with possible expansion to 800,000 bpd. That would give Bakken producers and “other emerging crude oil sources (in the Midcontinent) capacity to move secure reliable supply to U.S. Gulf Coast refineries, offsetting supplies of imported crudes.
“By leveraging existing infrastructure wherever possible, impacts to landowners, communities and the environment will be minimized,” Daniel said.
Daniel said the Gulf Coast Access projects would give Bakken and Western Canadian producers “timely, economical and reliable options to deliver a variety of crudes to refinery hubs throughout the heart of North America and now as far as the Gulf Coast” by extending Seaway from Houston to the Port Arthur/Beaumont refining hub.
Mainline system expansion
In addition, based on results from an open season, a separate pipeline from Enterprise’s ECHO terminal in Houston to Port Arthur, Texas, is expected to come on line in early 2014.
Chad Friess, a UBS Investment Research analyst, said Enbridge will also have to expand its Mainline system out of Alberta, to move additional volumes from Canada into the U.S.
In an apparent change of heart caused by rising gasoline prices, the Obama administration is showing a willingness to expedite approval of TransCanada’s plans to build the southern leg of Keystone XL from Cushing to the Gulf Coast. An Enterprise spokesman said the Seaway plan presents the administration with a chance to expedite a pipeline project along the same lines, a year after a TransCanada executive said that link was not financially viable.
Now TransCanada says the constraints on moving crude from North Dakota and Montana, along with Oklahoma and Texas, to Gulf Coast refineries require an answer.
“Dramatic
Although not a Keystone XL substitute, Seaway would help address WTI’s wide discount to Brent, which has hovered around $18-$20 per barrel over recent times, and allow Midcontinent producers to secure higher prices.
But it is the first project on the drawing boards to alleviate the bottleneck at Cushing and, in Daniel’s view, eat away at stockpiles of crude in the Midwest to bring U.S. oil prices closer to global barrels.
It’s especially crucial for Canadian producers grappling with heavy discounting of their new wave of light crude from Bakken and other plays and heavy crudes from the oil sands. Those have traded as much as $5.25 and $24 per barrel, respectively, below other U.S. prices.
Michael Tims, chairman of Calgary-based investment banker Peters & Co., describes the massive build out of new pipelines across the continent as “dramatic.”
He said “a lot comes from simultaneous dramatic growth in oil sands production, at the same time the Bakken production has been increasing.”
Although neither TransCanada nor Enbridge has conceded there might be a downside to the wave of pipeline construction they are spawning, others are not so sure.
Political and environmental reactions
Len Racioppo, president and director of Canadian money manager Jarislowsky Fraser, which has C$35 billion under management, including investments in four pipeline companies, said the stampede to build infrastructure could become politically and environmentally contentious.
He said alternatives could include competitors linking pipe to each other’s systems.
But the rivalry between TransCanada and Enbridge is so deeply rooted they are unlikely to share Racioppo’s view that “collaboration could result in much quicker approvals (along with) less profile and sensitivity.”
Another voice of doubt came from refiner Valero Energy, which has committed to taking 20 percent of the volumes from Keystone XL, but is unlikely to take oil from the southern leg.
A Valero spokesman said his company’s support was for the entire Keystone XL, “not just the southern leg, which will bring mostly light sweet crude, which helps but is not really what Valero is after.”
Stringham suggested that refiners who committed to Keystone XL were heavy oil refiners that were losing supplies from Mexico and Venezuela “and really need access to that heavy oil.”
However, a TransCanada spokesman said his company does not need the “same level of contractual support” for the southern leg as for the full project, adding that Valero is “not the only or the majority shipper on Keystone XL.”
Plenty of room for crude in Gulf Coast
Roger Ihne, a Houston-based refining market specialist at Deloitte & Touche, said there is plenty of demand for crude in the Gulf Coast for Seaway and TransCanada’s pre-build portion.
A spokesman for TransCanada said the company estimates the growth in U.S. light oil production will amount to 2 million bpd within a decade, and Seaway is designed to move only 400,000 bpd in its first phase.
“There will be a need for Seaway and (TransCanada’s Gulf Coast project) and additional pipeline projects once those two are in service to keep up with growth,” he said.
And it’s that thinking, apparently shared by Enbridge, that cools off the desire to portray the current arm-wrestling between TransCanada and Enbridge as a battle to the bitter end.
