In its push to provide fresh market outlets for Alberta oil sands crude, with a piggyback for Bakken producers in the United States and Canada, Enbridge has run afoul of Canada’s National Energy Board, NEB, with one project, but remains on track with another.
NEB has delayed by at least several months beyond the scheduled startup this fall of Enbridge’s newly reversed Line 9 to Montreal-area refineries, ruling that the company has failed to install shutoff valves at 98 of 104 water crossings.
On the flip side, the Flanagan South pipeline from Chicago to Cushing, Oklahoma, is being readied to come onstream in December, with plans to carry 600,000 barrels per day of mostly heavy crude, although some space could be available for lighter crudes.
These developments occur against a backdrop of record Canadian crude exports to the United States, debunking the constant talk that shipments across the Canada-U.S. border are facing irreversible decline.
In the four weeks ending Oct. 3, the U.S. Energy Information Administration reported that Canadian volumes averaged 2.98 million bpd, climbing to a record 3.25 million bpd on Oct. 9 and projected to reach 3.91 million bpd in 2015 on a flight path to 6.44 million bpd in 2030.
However, the drag on pipeline additions is unchanged, with analysts at CIBC World Markets reporting that much of the latest increase is due to the ramp up in crude-by-rail shipments, which the Canadian Association of Petroleum Producers, CAPP, forecasts could grow from the current 200,000 bpd to 700,000 bpd in 2016.
Rising output from the Bakken and Eagle Ford formations has seen U.S. domestic production surge to its highest levels since the 1980s (see story on page 1) and raised hopes that the U.S. can achieve self-sufficiency, displacing 7 million bpd of imports.
But Greg Stringham, vice president of oil sands and markets at CAPP, told the Calgary Herald there is still “plenty of room” for Canadian producers to grow their exports if countries such as Mexico and Venezuela “back out” of shipments to the Gulf Coast.
He said that despite the talk about a lack of pipeline takeaway capacity Canada is “still moving every barrel we need to.”
Concern with safety conditions
But the hiccups facing Canada’s big pipeline companies, Enbridge and TransCanada, remain a constant theme, with Canada’s federal regulator pulling a surprise by announcing it is “not persuaded” that Enbridge is meeting the safety conditions the NEB imposed last March when approving plans to reverse the 40-year-old Line 9 covering about 385 miles.
“The board takes the protection of people and the environment seriously and it expects the same of companies it regulates,” NEB secretary Sheri Young said in a sharply-worded letter to Enbridge.
An Enbridge spokesman said the company was discussing exactly what action the NEB required, adding “we have and will continue to work with the NEB to explain our rationale and address all of their concerns.”
The NEB said Enbridge will not be able to apply for a final permit to start operations until at least 90 days after it has responded to the concerns raised in its letter.
At issue is Enbridge’s approach to safety when the pipeline traverses “major water crossings.”
Once it designated a river or stream as “major” Enbridge was required to install shutoff valves on both banks so the flow of crude could be quickly stemmed in the event of a line break.
The NEB said Enbridge has failed to clearly justify why some water crossing were designated as major and others were not and ordered the company to identify where spills would pose a significant risk to the public or the environment.
Line 9 has previously carried imported crude from Montreal to refineries in southwestern Ontario until pressures from western producers in Canada and the U.S. prompted it to reverse the flow and expand capacity to 300,000 barrels per day.
The project had long been considered the least controversial of all the pipeline proposals before regulators, even though environmental groups along the right of way in Ontario and Quebec had voiced opposition.
“I think this is a major setback for Enbridge,” said Adam Scott, project manager with Toronto-based Environmental Defense.
“They clearly just figured they could get this project rubber-stamped and push through without actually improving the safety of the pipeline.”
Scott said it appears from the NEB letter that Enbridge will need to reopen construction on the line to install the required valves.
He said the Line 9 events shows Enbridge’s “take on safety is still lax,” despite the public and regulatory criticism heaped on it after one of its lines spilled 3 million liters of crude into a tributary of the Kalamazoo River in Michigan in 2010.
Commenting on Flanagan South, Martin King, an analyst at FirstEnergy Capital, said Canadian exports could make rapid gains as the system ramps up and even allow Canadian crudes to re-export the volumes out of the U.S. provided they are not mixed with U.S. production.
Already producers have legally bypassed the U.S. export ban by using systems such as the southern leg of Keystone XL, while Valero Energy holds an export permit for Canadian crude shipments from the Gulf Coast.
Justin Bouchard, an analyst with Desjardins, said the opportunity for re-exports exists, but it faces the challenge of proving that the shipments are confined to Canadian crude - a challenge he suggested could be easily overcome if the crude is moved by rail.
But the latest series of developments make it clear that the options for getting crude to markets are far from one-dimensional.
