Enbridge Talking With Valero on East Coast Pipeline Reversal

Enbridge Inc. (ENB), Canada’s largest pipeline owner, is in talks with Valero Energy Corp. (VLO) and other refiners about reversing the flow of a pipeline to ship Canadian crude to the U.S. East Coast, said Chief Executive Officer Patrick Daniel.

Enbridge is talking to “all” refiners on the East Coast and in the Maritime provinces in eastern Canada about the possibility for the company’s Line 9, Daniel said in an interview at Bloomberg headquarters in New York. The reversal of the line, which currently transports crude from Quebec to Ontario, might happen as early as 2014, he said.

“This is by far the most viable way to move light crude east,” said Daniel. “Everyone is saying conceptually it makes sense.” The company would be “re-reversing” the Line 9 pipeline, which originally ran east to Montreal.

From Montreal, crude could move to Portland, Maine on the Portland-Montreal Pipe Line system, which also would have to be reversed, and then loaded on tankers for transport to refineries in Philadelphia and other destinations, Daniel said.

A pipeline system capable of bringing crude to East Coast markets may improve a bleak outlook for refineries there, Lynn Westfall, executive vice president of Turner, Mason & Co., a Dallas-based energy consultancy, said in an interview yesterday.

Refineries Shuttered

Three East Coast plants were put up for sale last month after their operators, including Sunoco Inc. (SUN) and ConocoPhillips, said they wouldn’t be profitable in the long term. Sunoco said it will idle its Pennsylvania refineries in Marcus Hook and Philadelphia by July 2012 if it can’t find a buyer. ConocoPhillips (COP) said last week it will close its 185,000-barrel- a-day plant in Trainer, Pennsylvania, if it isn’t sold.

The prospect of accessing cheaper crude from inland North American production may improve the attractiveness of those plants to some buyers, Westfall said.

Refiners along the Atlantic coast have lost money because they pay more than other U.S. competitors for the crude they process, much of which comes from the North Sea. The spread between the price for imported Brent oil tied to the U.K.’s North Sea production and U.S. crude prices reached a high of almost $27 Sept. 6, according to Bloomberg data.

“That’s been killing the East Coast refiners right now,” Westfall said.

Reversing the line and unlocking “somewhat stranded” Canadian crude “makes perfect sense for Enbridge to do,” said James Williams, an economist at WTRG Economics, an energy research firm in London, Arkansas.

“When you have a problem with a platform or a bad storm or a pipeline leak in the North Sea, Brent goes through the roof,” Williams said. “This would help insulate the East Coast from all those vagaries of Brent crude.”

East Coast Squeeze

The difference between the cost of oil on the East Coast and the price at which Sunoco and Conoco can sell gasoline and other refined products has ranged between $4 and $12, a lower profit margin than any other area in the U.S., Sam Margolin, an analyst at Global Hunter Securities, LLC in New York, said in an interview yesterday.

“Something has to change or there just won’t be any East Coast refiners,” Margolin said.

Valero, the largest independent U.S. crude refiner by revenue, reported second-quarter earnings below analysts’ estimates because of losses at its refinery in Quebec City, Quebec.

New technology and drilling techniques that have unlocked oil trapped in shale across North America will bring production of light crude in the U.S. to 2.1 million barrels a day, Stephen Wuori, president of Enbridge’s liquids pipelines division, told investors October 4.

Natural Destination

One destination for much of that oil, which is expected to come primarily from new fields in North Dakota, Texas and Colorado, is the East Coast, where refineries are equipped to process light crude. Refiners closer to the new production areas have upgraded to process heavier Canadian grades of oil, Wuori said.

Gulf Coast refiners can only process about 1 million barrels a day of light crude, said Turner Mason’s Westfall.

“We’re always interested in looking at alternate methods of supplying our refineries,” Bill Day, a Valero spokesman, said in an interview today.

Day declined to comment on any discussions between Valero and Enbridge.

To contact the reporter on this story: Bradley Olson in New York at bradleyolson@bloomberg.net; Jeremy van Loon in Calgary at jvanloon@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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