Providing coverage of Alaska and northern Canada's oil and gas industry
May 2020

Vol. 25, No.19 Week of May 17, 2020

Exploring the long route for oil shipping

Irving Oil applies to ship Alberta crude bitumen from West Coast to refinery on East Coast; hope glimmers for 3 export pipelines

Gary Park

for Petroleum News

Amid the anguish and turmoil of COVID-19 some shreds of hope are surfacing within Canada’s petroleum industry, especially driven by one idea that ranges from innovative to unthinkable.

Faced with the unyielding resistance of the Quebec government, which is now calling for the oil sands sector to wind down (apparently unaware that the maligned resource contributes C$11 billion and more a year to the Quebec coffers through a federal wealth redistribution), the Alberta-based industry had given up on its dream to ship more than 1 million barrels per day of crude bitumen to the Irving Oil refinery and an export terminal in New Brunswick.

That proposal by TC Energy was shelved in 2017 as threats of legal and civil action against the C$15.7 billion Energy East project reached a crescendo.

Pipeline headed west

But the basic objective of Energy East has suddenly resurfaced with a plan by Irving to ship crude by pipeline from Alberta through the expanded Trans Mountain system to a tanker port in the Vancouver area and from there by ship down the Pacific Coast, through the Panama Canal and up the Atlantic Coast to New Brunswick.

When Energy East was first launched, Irving had committed to building a C$300 million export terminal at its Canaport facility in Saint John, New Brunswick. Whether that idea has gained fresh life is unclear.

For now, Irving said it has gained approval from the Canadian government to “sourcing additional Canadian crude for our refining operations,” thus slashing the reliance by its refineries on feedstock from the volatile Middle East and African sources, with Saudi Arabia accounting for a significant percentage of the 360,000 barrels per day that it refines, though it has been importing more from the United States in recent years.

Panama option

The company submitted a formal proposal for its Panama option in April 16 with the Canadian Transportation Agency, requesting permissions to use the Panama route - which would cover 7,300 miles compared with 2,900 miles for the Energy East system - “on an urgent basis.”

It said the plan would allow for effective and flexible supply-chain planning and would strengthen Irving’s connection with Canadian producers in a challenging and uncertain time.

“From Western Canada to offshore Newfoundland, we’re expanding our reach as we continue to pursue solutions that help create energy security (for Canada),” an Irving spokeswoman told the National Post.

The solution would also largely bypass the opposition to pipelines from the Quebec, Ontario and British Columbia governments and from activist organizations.

In addition, Irving is exploring ways to source Canadian crude that is primarily shipped on the existing Keystone pipeline to Gulf Coast ports in Texas and Louisiana.

Frank McKenna, a former New Brunswick premier and Canadian ambassador to the United States and a key consultant in the Energy East project, described the new shipping plan as a “spectacular thing” that is “patriotic and pragmatic.”

Dinara Millington, vice president of the Canadian Energy Research Institute, admitted her organization has never looked at the Panama “pathway.”

She said that if Irving can secure tankers “for the longer-term, it just has to be economic at the refinery gate.”

Pricing dynamics between heavy oil benchmark Western Canadian Select, West Texas Intermediate and Brent benchmarks could see Irving source more WCS over the long-term.

Line 3 replacement

Another injection of optimism has raised hopes that Enbridge will eventually complete its replacement Line 3 from Alberta to Superior, Wisconsin, boosting capacity to 760,000 bpd from 390,000 bpd.

After being sidetracked by state regulators, Line 3 got positive news from the Minnesota Public Utilities Commission on May 1, gaining a written order relating to final approval.

Enbridge Chief Executive Officer Al Monaco told his company’s annual meeting that it will not set a completion date until it receives the remaining permits need to start construction, which is expected to take up to eight months and provide jobs for 4,200 workers. The Canadian section of the line was completed late last year.

Chris Bloomer, chief executive officer of the Canadian Energy Pipeline Association, said that if and when crude demand picks up, Canada is position for a quick turnaround because of the U.S. refineries that are configured to use Alberta heavy crude.

The convergence of these positive developments could also overcome growing unease over the long-standing assumption that volumes of 890,000 bpd on the new Trans Mountain system would find an outlet in Asia, especially China.

Kevin Birn, with energy consultant IHS Markit, said the importance of new pipelines “in this current environment has certainly waned in the very short term, but in the longer term, there is need for incremental (pipeline) capacity.”

Patrick Kenney, an analyst with National Bank Financial, told the Calgary Herald that in another three or more years Western Canada “will figure out a way to fill (new) pipelines, assuming commodity prices have rebalanced and demand has come back.”

A spokesman for the Canadian Association of Petroleum Producers said that although new pipelines could come on stream without operating at capacity “that would largely be a temporary issue,” assuming COVID constraints and economic contraction “don’t change the long-term need for increased oil egress.”

If the Panama option, Keystone XL, and the expansions of Line 3 and Trans Mountain all come on stream, they will offer almost 3.5 million bpd of capacity, of which 2.8 million bpd would be incremental.

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