Enbridge Inc. (ENB)’s plans to expand U.S. pipeline capacity may help generate as much as $15 billion for Canadian oil-sands producers such as Suncor Energy Inc. (SU) and boost government tax revenue as Alberta crude begins to command a higher price.
Canadian crude has been backing up in the U.S. trading hub at Cushing, Oklahoma, along with oil produced in North Dakota, forcing down prices. Western Canada Select oil, a Canadian benchmark, has sold for about $42 a barrel less than world prices this year, a record gap, according to data compiled by Bloomberg. The differential is more than four times greater than the same period two years earlier.
Two projects announced on March 26 by Calgary-based Enbridge and U.S. partner Enterprise Products Partners LP (EPD) would expand crude capacity to the Gulf Coast by 500,000 barrels a day by 2014, a big step toward narrowing the price gap, said Roger McKnight, senior petroleum adviser at En-Pro International Inc., an Oshawa, Ontario-based energy adviser.
“That discount can absolutely be cut in half,” McKnight said yesterday in a telephone interview. “Something’s got to give because you have a huge economy in Alberta and the rest of Canada dependent on getting this oil to market.”
Reducing the gap just by half would represent $15 billion a year in additional value for Canada’s estimated 2 million barrels a day of exports to the U.S., according to Bloomberg data.
Enbridge will probably be the first to add additional capacity to transport Canadian crude to new markets as it races cross-town competitor TransCanada Corp. (TRP), whose Keystone XL conduit is being built in sections after President Barack Obama blocked its Canada-U.S. cross-border leg in January.
Enbridge’s plan may not face as many challenges as the Alberta-to-Texas Keystone XL project because it doesn’t cross the border, so it won’t need U.S. State Department approval, and Enbridge’s southern pipeline expansion can be built on existing right of way.
“Make no mistake, this suite of assets does not face the same pressure point as the competing XL system,” Carl Kirst, an analyst with BMO Capital Markets in Houston, said today in a note to clients.
Output from the oil sands and new formations including North Dakota’s Bakken shale may increase by 3.5 million to 4.5 million barrels a day by 2020, said Jackie Forrest, senior director of global oil for IHS Cambridge Energy Research Associates. Without new pipelines, the oil will get backed up in Canada and the U.S. Midwest, she said.
“This expansion of the Enbridge system will help get rid of some of those bottlenecks,” Forrest said yesterday in a telephone interview. “That should help to narrow the disconnect between Canadian and other U.S. crudes and the rest of the world.”
The Enbridge and TransCanada lines together would add more than 1.2 million barrels of capacity to transport crude produced in Canada’s oil sands to Texas refineries.
More oil arriving in the U.S. from Canada would boost refiners including Marathon Petroleum Corp. (MPC), Valero Energy Corp. (VLO) and Royal Dutch Shell Plc (RDSA), which faced declining margins on processing heavy crude on the U.S. Gulf Coast as it began to trade at a premium to lighter grades of U.S. oil for the first time in 20 years, according to data compiled by Bloomberg.
Refiners invested more than $25 billion to upgrade plants in anticipation of added volumes from Canada that theoretically could improve the profits of processing crude because heavy oil has traditionally been cheaper.
The lack of supply from Canada, combined with added demand created by the upgrades, has made heavy oil more expensive for the first time since 1992. Mayan crude, a heavy grade from Mexico, cost an average of $5.89 more than lighter West Texas Intermediate, the U.S. benchmark, so far in 2012. In the first quarter of 2010, WTI cost $9.03 more a barrel than the Mexican crude, according to data compiled by Bloomberg.
The first of Enbridge’s plans is a $2 billion project with Enterprise to reverse the flow of the Seaway pipeline and expand its capacity. When completed in 2014, as much as 850,000 barrels a day will flow from Cushing to the U.S. Gulf Coast, the companies said.
Enbridge’s Flanagan South project, which would cost $2.8 billion and be completed around the same time, would be built along the route of its existing Spearhead pipeline and have a capacity of 585,000 barrels a day.
The company’s existing crude mainline to Chicago has spare capacity that will allow Enbridge to boost shipments of Canadian oil to the U.S. by as much as 500,000 barrels a day, Vern Yu, vice president of business development and asset management at Enbridge, said yesterday in a telephone interview.
With additional projects the company is considering, Enbridge could increase that amount to 1 million barrels a day, he said.
TransCanada’s Keystone XL and Enbridge’s system expansions will both be needed, Yu said.
“If you look at the supply picture coming out of western Canada and North Dakota’s Bakken, we think both pipelines are necessary to move the crude out of those producing regions,” he said. “The 2015 to 2017 time frame is when both networks are needed.”
Pipeline development has become a rallying cry for Prime Minister Stephen Harper, who has said new markets for Canadian oil is in the “national interest.” Federal Natural Resources Minister Joe Oliver has called environmental groups who oppose oil-sands pipeline development “enemies” of Canada.
Exports to U.S.
About 99 percent of Canadian crude exports go to the U.S., with most of that ending up in the Midwest. Currently, producers including Cenovus Energy Inc. (CVE) are resorting to freight trains to transport crude. Other proposals for additional routes include increasing pipeline capacity to Canada’s Pacific coast as well as reversing or building new lines to the Atlantic provinces through Quebec.
Expanding exports to the U.S. and tapping markets in Asia may raise the price received by Canadian producers by $13.60 a barrel by 2030 and add an additional C$131 billion ($131.2 billion) to Canada’s economy from 2016 to 2030, according to a Dec. 15 study by the University of Calgary’s School of Public Policy.
More than two-third of Canada’s total crude oil production of about 3.5 million barrels was exported, according to the C.D. Howe Institute in a Feb. 29 report. Energy products, also including hydro power and natural gas, accounted for more than 22 percent of Canada’s export revenue in 2010, the Toronto-based think tank said.
Oil is Canada’s most valuable export and every additional dollar increase in the value of oil over a 12-month period adds C$223 million to the province of Alberta in tax revenues and royalties, the government says.
Enbridge and Houston-based Enterprise are scheduled to move more than 150,000 barrels a day of capacity on the reversed Seaway pipeline by June 1. That will rise to 400,000 barrels by 2013 after pump additions and upgrades, and more than 850,000 barrels by 2014, the companies said.
The two projects will add $3 a share, or $2.35 billion, to Enbridge’s value, said BMO’s Kirst.