March/April 2013

Feeling the squeeze

Oil sands exporters search for pipeline alternatives to deliver their product to market

By Herb Mathisen

 

The pipeline network, including both existing and proposed lines, linking western Canadian oil with Canada and the U.S. | Courtesy of CAPP


Oil sands producers are losing $27 million each day due to steep discounts on Albertan oil, according to a recent report from Deloitte. This discount is due largely to the steady and growing supply of American and Albertan crude oil that is being stranded in Canada’s biggest export market, the U.S. Midwest, particularly at a major pipeline hub in Cushing, Oklahoma. As a result, oil sands companies are looking at creative options to get their oil to new markets. And while the Keystone XL and Northern Gateway pipelines, designed to connect Canadian oil with the U.S. Gulf Coast and Asian markets, work through political bottleneck, new projects to move oil to thirsty markets within Canada are gaining steam.


In 2011, eastern Canadian refineries imported just over 300,000 barrels per day (bpd) from Western Canada but roughly 600,000 bpd from foreign markets. This foreign oil is more expensive than western Canadian crude due largely to its ability to access world markets. As a result, flowing Albertan oil eastward would be a win for both producers and refiners.

Travis Davies, spokesperson for the Canadian Association of Petroleum Producers, said Canadian pipeline options could provide some of the quickest solutions for Alberta’s pricing problems. For instance, the Enbridge Line 9 reversal project could begin as soon as mid-2013, adding more than 200,000 bpd to refineries east of Sarnia, Ontario. And TransCanada’s plan to convert its natural gas Canadian Mainline to start moving oil to Montreal, and possibly by barge to Canada’s biggest refinery in Saint John, New Brunswick, is gaining momentum. This project is attractive, said Davies, because most of the infrastructure is already in the ground, and with ­natural gas production rising in the northeastern United States, demand for western Canadian natural gas in that market is shrinking.

Grady Semmens, a spokesperson for TransCanada, said their project is technically and economically feasible, adding it could transport between 500,000 to one million bpd to Canadian refineries. In comparison, without any unforeseen regulatory delays, the Northern Gateway pipeline would flow roughly 525,000 bpd by 2017 and Keystone XL as much as 830,000 by 2015. “We are having discussions with potential customers and we are pleased with the interest that has been expressed to date,” Semmens said. “We will have to turn that interest into long-term commercial contracts before we could spend the billions [that are] required to make this project a reality.” Semmens noted the earliest the pipeline could begin moving oil is 2017, and added the location of where the pipeline would end has not yet been determined.

Meanwhile, both CN and Canadian Pacific (CP) have expanded their oil-shipping potential to meet industry demand. Since CN began looking at transporting heavy crude, light crude and bitumen from Western Canada in 2010, it has scaled up its shipments from 5,000 carloads in 2011, to 30,000 in 2012, with hopes to double that to 60,000 carloads – or more than 90,000 bpd – in 2013. A carload carries 550 barrels of heavy crude or 650 barrels of light crude. CP has already upped its overall capacity to 70,000 carloads for 2013, and Ed Greenberg, CP spokesperson, said the rail giant could double or triple that volume in the coming years. “Ultimately though, the market will be developed by the energy industry,” he said.

Mark Hallman, a CN spokesperson, said rail would not replace pipelines but supplement them. CN’s network gives companies access to new markets not currently served by pipelines. “Once you are on the rail network, you are not tied to a specific market,” he said. “You can ship to the most profitable market of the day.”

Southern Pacific Resource Corp., a Calgary-based junior, has done just that, signing a five-year deal with CN to ship diluted bitumen from its STP-McKay Thermal project, located 45 kilometres north of Fort McMurray, south to the Gulf of Mexico. Foregoing the traditional pipeline method gives the company access to more competitive markets, meaning it can get a better price for its product.

Oil sands production is expected to continue growing, and Geoff Hill, Deloitte’s oil and gas sector leader, insists producers must convince average Canadians that improving transportation infrastructure is in the national interest, granted it is done in a safe and environmentally responsible way. The Deloitte report, Gaining ground in the sands 2013, estimates a potential for $2.1 trillion in economic benefits – including $783 billion in taxes paid – from the oil sands to Canada over the next 25 years. “It’s almost impossible to think of another source of income that would replace that for Canada,” said Hill.

The discount explained

The majority of crude oil and bitumen exports from Western Canada are sent to the U.S. Midwest through thousands of kilometres of pipeline. This supply has recently been supplemented by surging production in North Dakota’s Bakken region, which has also eaten up some of Western Canada’s pipeline capacity. The resulting oil glut at a major pipeline hub in Cushing, Oklahoma, means Alberta has to sell its oil at a cheaper price.

According to the U.S. Energy Information Association, the West Texas Intermediate (WTI) benchmark sold out of Cushing had been trading on par with the European Brent benchmark as recently as two years ago, but dropped significantly since the Keystone Phase Two pipeline started sending more oil to Cushing in early 2011. This spread had expanded to more than $20 per barrel in February 2013. Western Canadian oil sells at a further discount to WTI due in part to its inability to access other markets. In December, a barrel of Western Canadian Select, a heavy conventional and bitumen blend, sold for $40 less than WTI. Other products, like Syncrude’s upgraded light sweet crude, did better, but still sold at a $2.52 per barrel discount to WTI in 2012. Siren Fisekci, vice-president of investor relations with Canadian Oil Sands, a 36.74 per-cent shareholder in the Syncrude joint venture project, expects this gap will widen to $5 per barrel in 2013. “Given the tight pipeline capacity and the growth in supply, we are seeing more volatility in our pricing,” she said.

“It would be very difficult to see this spread reducing without major pipeline announcements,” added Deloitte’s Geoff Hill.

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