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Hungry China market grabs oil sands spotlight Enbridge hopes for formal contracts for synthetic crude with one or two Chinese refiners and Western Canadian producers by mid-2005 Gary Park Petroleum News Calgary Correspondent
Formal contracts could be in place by mid-2005 to open up the voracious Chinese market to synthetic crude from the Alberta oil sands, officials on both sides of the Pacific have indicated this month.
Enbridge President and Chief Executive Officer Pat Daniel said memorandums of understanding could be signed early in 2005, followed by formal contracts involving Enbridge, Western Canadian producers and possibly two of China’s four largest refiners.
For three years, Calgary-based Enbridge has been shopping its plans for the C$2.5 billion Gateway pipeline that would ship 400,000 barrels per day from the oil sands to a deepwater port at Prince Rupert or Kitimat.
Daniel said 75 to 80 percent of the volumes would be carried by tanker to Asia, with the balance going to southern California. An in-service date of 2009 is being targeted.
His disclosure gave added weight to remarks by Qiu Xianghua, vice president of Sinopec that the state petroleum and chemical company wants to invest in the oil sands. Hopes for diversifying oil sands markets With almost uncharacteristic speed, given the Chinese reputation for long and painstaking negotiations, these prospects have raised hopes that Alberta can achieve its goal of diversifying oil sands markets beyond North America.
Daniel told the Vancouver Board of Trade Dec. 10 that Asian interest in the oil sands has “been our most pleasant surprise … to date.”
He said China, Japan and South Korea have all indicated a desire to participate in the Gateway pipeline “particularly China, where their booming economy requires energy to fuel continued growth.
“Potential Asian and Pacific customers are looking very seriously at investment, not only in the pipeline but also in the upstream production of heavy oil to move into China,” he said.
Although the focus is on opening doors to Asian markets, Enbridge is negotiating with prospective customers in California who could take 80,000-100,000 bpd from gateway to offset declining volumes from Alaska.
But Enbridge spokesman Jim Rennie told Petroleum News Dec. 13 that the Californians would prefer to see the Asian contracts resolved first.
He said the memorandums of understanding would firm up the base volumes needed to move ahead with Gateway and an open season would provide a chance to fill out the pipeline’s capacity.
Xianghua said in Toronto Dec. 6 that the oil sands are “remarkable resources and we are currently investigating them. China needs oil resources and has a big market. Canada needs markets.”
While suggesting investment would be “mutually beneficial and complementary to both countries,” he did not say whether Sinopec favored an upstream stake, equity ownership of a pipeline or just a supply contract. ‘Anchor tenant’ for Gateway most likely from China Daniel said Gateway’s “anchor tenant” would likely be from China, although Enbridge would build and maintain majority ownership of the 720-mile pipeline, while offering minority interests to Chinese refiners or Canadian producers.
Industry sources believe Husky Energy is a strong contender to participate in the pipeline, given its extensive interests in the oil sands and heavy oil region.
It expects to complete its 35,000 bpd Tucker project within two years and could start work on a 200,000 bpd Sunrise project in 2008. As well, it owns a heavy oil upgrader that will soon have capacity of 82,000 bpd.
Although Sinopec recently denied that it was negotiating a possible takeover of Husky, which is controlled 70.7 percent by Hong Kong tycoon Li Ka-shing, the state-owned firm’s admission that it is eying a role in the oil sands has kept that speculation alive.
Daniel said last month that there is “urgency” to open up oil sands markets outside North America.
But until talks with producers, refiners and downstream markets are concluded, Enbridge is not setting a date for an open season for firm shipper contracts. Enbridge has laid out case for new markets However, the company has publicly laid out its own case for accessing new markets.
It has noted that the tanker route from Prince Rupert to Japan covers only 3,840 nautical miles compared with 6,340 miles from the Persian Gulf and 8,600 miles from Venezuela, the world’s other major source of heavy oil.
Enbridge has also projected that long-term pipeline tolls from Alberta to Prince Rupert or Kitimat would be US$1.75 per barrel, with another US$1.30 per barrel for the tanker rate.
That would make it competitive with rival Terasen, which Enbridge estimates has an existing pipeline toll to Vancouver of US$1.75 and could race a tanker cost of US$3 per barrel from Vancouver to Asia.
Meanwhile, Terasen sent documents to current and prospective customers asking for a show of interest in the proposed expansion of the TransMountain Pipeline System from Alberta to Vancouver.
Based on the responses, an open season is likely by mid-2005 for plans to raise Terasen’s shipping capacity to the British Columbia coast to as much as 850,000 bpd.
An initial Anchor Loop would cost C$570 million and raise volumes by 300,000 bpd by 2008. TransMountain is currently operating at capacity of 225,000 bpd.
If expansions are approved beyond the Anchor Loop phase, there are two options costing C$1.7 billion and C$2 billion.
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