Sept/Oct 2011

The energy exchange

The global marketplace is full of promise for Canadian energy producers – the challenge is getting there

By D. Zlotnikov

The Christina Lake operation of Cenovus Energy | Courtesy of Cenovus Energy

Canada, blessed with vast deposits of coal, uranium, natural gas and crude oil, has the resources to help meet the world’s energy needs. The country’s energy exports in 2010, including electricity, amounted to $90.7 billion in revenues, nearly a fifth of all our exports. Most of the cash came from the sale of oil, and virtually all of it came from the United States, which buys some 97 per cent of Canada’s energy products.

With such strong, longstanding trade ties and advantages of geography, one might expect Canada’s energy sector to have a shining, trouble-free future, but few things in life are so simple – and virtually nothing is simple when it involves moving hundreds of thousands of tonnes of material every day.

Consider oil. As Canada’s oil sands production continues to grow, operators are struggling to get it to the customers, and existing pipeline capacity to the Gulf Coast is simply not enough. According to Esther Mui, an independent industry analyst and a former senior vice-president of oil and gas with credit rating agency DBRS, Canadian producers are already seeing the negative effects of capacity shortages.

“There is a $10 to $20 difference between the price of WTI (West Texas Intermediate crude) and London’s Brent crude," Mui explains. “It used to be $1 or $2; however, now we have substantial bottlenecks at Cushing, Oklahoma. A lot of Canadian heavy oil is not getting to the refineries in the Gulf where this can be processed.”

Two pipeline projects are trying to address the bottleneck issue. The first is the Keystone XL expansion proposal by TransCanada Corporation. Previous stages of the Keystone project saw TransCanada link its Hardisty, Alberta, facility to Patoka, Illinois, and then to the Cushing hub.

The $7 billion Keystone XL project will extend both the pipeline’s reach and capacity. All told, the project is slated to add another 500,000 barrels per day (bpd) of transport capacity, for a total of 1.1 Mbpd.

Building capacity

Considering that in 2010 Canada exported over 925 million barrels of oil to the United States, producers are eager to see the project completed. Not only is over 80 per c Keystone XL’s capacity already under long-term contract, but Mui says that the future shippers have signed cost-sharing agreements with TransCanada. “If there are some costs overruns, whether because of delays or acceleration of the construction, the shippers will share at 75 per cent of the overruns,” she explains.

For oil sands producers like Cenovus, much rides on Keystone XL. According to Jessica Wilkinson, the company’s spokesperson, Cenovus is confident that the Keystone expansion will go forward. The company’s 10- year strategic plan, announced in 2010, was to more than quadruple its current production, reaching 500,000 bpd by the end of 2021. Wilkinson says the new plan has the company increasing production sooner. “What we’re doing is increasing total production capacity at Foster Creek [Alberta] to 270,000 to 290,000 bpd gross by increasing capacity at future phases and drilling some strategic wells,” she says. The company has also completed its latest expansion, the 40,000 bpd Phase D at its Christina Lake operation in northeast Alberta in early August, six months ahead of the original schedule. With such aggressive expansion plans, new transport capacity is of major importance to Cenovus. That said, Wilkinson adds that the company is also looking at alternatives to raw pipeline capacity: “long-term supply agreements with our current pipeline partners, financial hedges, working with existing refineries to see if they can process more heavy oil, and new technology that partially upgrades the oil, potentially increasing refinery ownership,” she explains. “We’re prepared to evaluate a number of options.”

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