Between feast and famine

Pipeline firms vie for producer backing to build new crude capacity from Western Canada; industry association sees Gulf Coast and California markets as best bets

Gary Park

Petroleum News Calgary Correspondent

Major energy pipeline companies relying on Western Canada crude supplies are engaged in a tough juggling act to bring new capacity on stream and handle a forecast 50 percent increase in crude production over the next decade, says the Canadian Association of Petroleum Producers.

But there is ample reason to find solutions as potentially lucrative opportunities emerge in the U.S. Gulf Coast and California, the association suggested in a 17-page study released Feb. 17.

CAPP Markets Vice President Greg Stringham believes the “crunch point” could occur about 2010, meaning that producers must commit to new pipelines this year if they are to come on stream when needed and avoid a supply glut from the oil sands.

Developing new pipelines in a “timely fashion” is important for two reasons: Whether space lags behind or exceeds demand, the costs will be borne by producers, either directly or indirectly, the study concludes.

Since the late 1990s, pipeline capacity out of Western Canada has grown by 550,000 barrels per day and forecasts indicate the need for another 600,000 bpd over the next decade as combined output rises to 3 million bpd by 2010 and 3.3 million bpd by 2015, the study says.

Drawn by those predictions, pipeline companies are jostling for producer support for proposals that would introduce more than 2 million bpd of new capacity to either the British Columbia coast or the U.S. Midwest over the next five years, with Enbridge planning 650,000 bpd in two systems, Terasen 625,000 bpd, Koch Pipelines up to 350,000 bpd and TransCanada 435,000 bpd.

Beyond 2015

Currently, the major trunk line systems operated by Enbridge and Terasen are operating about 300,000 bpd short of their capacity of 2.3 million bpd.

But the association, which has been working with producers to address pipeline issues, suggests those excesses could be swallowed up if U.S. refiners start running Canadian synthetic crudes to offset declining U.S. supplies of light crude and new markets open up in the Gulf Coast and California, which are both predominantly medium and heavy crude outlets, making them a “very good fit” with Western Canada’s growing slate of heavier crude volumes.

The study said California has 10 medium to large refiners, with combined capacity of 1.5 million bpd, with two-thirds of the feedstock coming from local production or the Alaska North Slope — but both sources are declining in excess of an average 4 percent a year.

As a result, California refiners are increasingly turning to offshore crude, with those supplies climbing over the last five years from 100,000 bpd to 325,000 bpd.

The study said that the outlook for Alaska crude “has somewhat stabilized over the last two years, but long-term production forecasts continue to indicate an expected steeper decline beginning as early as 2006.”

It said Canadian medium and heavy sour crudes should be able to compete effectively with waterborne alternatives currently used by California refiners.

Stringham said Alberta’s recent progress in blending light synthetic crude with heavy oil to create Synbit offers “characteristics very similar to the medium-grade the California refiners are already processing.”

Gulf Coast market possibilities

With roughly 35 percent of total North American refining capacity, the Gulf Coast currently imports more than 4.8 million bpd from a wide range of global sources, including about 2 million bpd of heavy sour crude.

A CAPP analysis of the competitiveness in the Gulf Coast indicates that Canadian heavy crudes would have been attractively priced to Gulf refiners over the last four winters, but would likely be uncompetitive in the summer when prices strengthen due to higher asphalt demand.

Those two outlets may offer better near-term prospects than the Asian markets, which have come into focus in recent months as several delegations have visited Western Canada to explore options for new supply and/or investment opportunities.

Both Enbridge and Terasen have pipeline proposals in the works that would connect northern Alberta to deepwater ports on the British Columbia coast, with possible links to Asia or California.

However, the study said that given the overall land and ocean distance from Western Canada, producers may see the Far East market as secondary to areas such as California.

Stringham told reporters that, despite the growing consumption in China, Japan and South Korea, few Asian refiners are equipped to handle medium and heavy crude.

He said the unanswered question is whether the economics will make sense for Chinese refiners after they factor in costs of transportation or an equity stake in a pipeline.

Pipeline proposals

• Enbridge Gateway — A C$2.5 billion system from Edmonton to Prince Rupert or Kitimat, offering 400,000 bpd by 2009-2010.

• Enbridge Southern Access — A possible US$650 million, 250,000 bpd connection from Superior, Wis., that could be in service by early 2007 and tie in with Enbridge’s planned Spearhead pipeline, a joint venture with BP, to reach the Chicago, Wood River or Cushing market hubs from an interconnection point in Illinois.

• Terasen — A staged expansion of the Trans Mountain pipeline from Edmonton to reach Greater Vancouver and/or Prince Rupert/Kitimat, adding up to 625,000 bpd of incremental capacity over the 2006-2010 period at a cost of C$2.6 billion.

• Koch — A two-stage project from Clearbrook, Minn., to Wood River, adding as much as 350,000 bpd of new capacity at a cost of US$560 million, by 2009-2010.

• TransCanada — The newly unveiled Keystone proposal from Hardisty, Alberta to Wood River, in service by 2008 or 2009 at 435,000 bpd and costing US$1.7 billion.