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Vol. 16, No. 7 Week of February 13, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Battle for hearts, minds

Kinder Morgan, Enbridge continue race to ship Canadian crude to Asia

Gary Park

For Petroleum News

For one, the route from Canada to Asia is step-by-step. For the other, it’s one giant leap. For both, it’s a challenge to build support at home.

What is increasingly evident is that both Kinder Morgan and Enbridge are engaged in an all-out race to build a bridge across the Pacific for Alberta oil sands crude.

And they have added incentive from a newly released analysis by the U.S. Department of Energy that fuels Washington’s worries about the ramifications of Canada opening up a new market for its crude.

The report concluded that “if more oil is shipped to Asia instead of the U.S. this would lead to higher U.S. imports of crude oil from non-Canadian sources, notably the Middle East” — a more-than-usual cause for unease given the increasingly erratic, uncertain outlook in the Middle East.

But, even if Canada does significantly increase its crude exports to Asia starting in 2015, that doesn’t rule out shipments to the U.S., especially if Kinder Morgan proceeds with additions to its 300,000-barrel-per-day Trans Mountain pipeline from Alberta to Vancouver and Washington state.

Declining Alaska volumes

Chad Friess, an analyst with UBS Securities, said some of the greater volumes on Trans Mountain could end up in California, replacing “a lot of the declining volumes from Alaska.”

“Alaskan crude is becoming increasingly scarce and California refineries are well prepared to handle heavier (Canadian) crudes. So it’s a good match,” he said.

However, it is not clear what the fallout would be if California goes ahead with its plans to implement a low-carbon fuel standard that could restrict or ban imports of oil sands crude.

For now, Kinder Morgan is taking the next step in expanding the Trans Mountain system by tentatively planning an open season later this year, seeking commitments for at least an 80,000 bpd increase in the pipeline’s capacity, which could mean greater shipments to California or Asian markets in China, South Korea, Japan and Singapore.

Kinder Morgan’s Canadian President Ian Anderson said his company needs to determine how big the pipeline expansion should be.

If the open season interest exceeds 80,000 bpd, that could trigger design changes to accommodate the demand, he said.

Shippers want more space

There is already a strong signal in that direction. In February, shippers asked for 33 percent more space on Trans Mountain than the pipeline could handle, partly because of a bottleneck on Enbridge’s mainline to the U.S. Midwest resulting from two ruptures last summer on Enbridge pipelines in Michigan and Illinois and partly because of growing interest in exports to Asia.

Kinder Morgan offered producers 50,000 bpd of guaranteed throughput at its Westridge tanker terminal in Vancouver. It received bids for 95,000 bpd and signed contracts for 54,000 bpd, pointing to steadily rising shipments to Asia, which received an average 14,800 bpd of Canadian crude last year, up 6.5 percent from 2009.

Of concern to Kinder Morgan is when Westridge will reach capacity and at what point opposition will surface to tankers moving through the Port of Vancouver. Some observers suggest the answers could involve building a terminal at Roberts Bank, outside Vancouver’s major population center, or increasing capacity to the Cherry Point terminal in Washington state, where the refinery derives most of its feedstock from Alaska.

Choppy waters for Northern Gateway

Meanwhile, Enbridge continues to push through choppy waters with its proposed 525,000 bpd Northern Gateway scheme, with Chief Executive Officer Pat Daniel pinning his hopes on the National Energy Board prevailing in the regulatory and political battle.

He said Feb. 3 that Canada’s federal regulator will “have to determine what is in the best national interest” as it deals with the Northern Gateway application, which he said is the largest application ever filed with the NEB.

But Enbridge is not giving up on its attempt to win over about 30 First Nations along the pipeline right of way from Alberta to British Columbia and on the B.C. Coast, by offering 10 percent stakes “at no cost” to the aboriginal communities by explaining the jobs and economic benefits the C$5.54 billion project will provide.

Even if there is not “universal and unanimous support” for Northern Gateway, the project is of “national strategic importance and significance” and will have a “very positive social and economic impact” because of its potential to diversify Canada’s crude exports from stagnating demand in U.S. markets, Daniel said.

He said Enbridge does not have a minimum target for First Nations sign up for the equity stake.

Although “not all (First Nations) are wildly embracing the Northern Gateway concept … we are working closely with those that are not yet convinced to turn their ‘No’ into a ‘Yes,’” he said.

“We truly want broad general and thorough support for the project because of its huge strategic value and we have made progress in bringing more on side,” he said, while conceding the opposition is “very vocal.”

Environmental opposition

Also at stake for both companies is the need to soften environmental opposition, over and above whatever concerns exist about tanker traffic in Vancouver waters, or in waters off the port of Kitimat, which both want for a tanker terminal.

Kinder Morgan’s options include building a spur line from Trans Mountain in central British Columbia to Kitimat, exposing it and Enbridge to fierce opposition from First Nations and environmentalists.

In 2008, Kinder Morgan completed a C$750 million project to add 40,000 bpd to Trans Mountain by twinning the system through Jasper National Park in the Canadian Rockies. It survived the scrutiny that entailed. Further expansion in the same area would likely encounter a rougher reception.



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