Crude from Alberta’s oil sands sells at a 30 percent discount to its U.S. counterpart. TransCanada Corp. Chief Executive Officer Russ Girling plans to narrow that gap whether or not his Keystone XL pipeline to the Gulf of Mexico wins approval from the Obama administration.
Canada’s second-largest pipeline company proposes to ship oil 3,000 miles (4,825 kilometers) to the Atlantic Coast, allowing producers to send it by tanker to the Gulf, Girling said yesterday in an interview at Bloomberg’s New York headquarters. While he expects U.S. passage of Keystone “very soon,” the East Coast route makes sense in any event because of rising production from Alberta, Girling said.
“It’s not a Plan B, it’s a Plan A, and it will go if the market supports it, along with Keystone,” Girling said in the interview. “Once you get on tidewater, you can get anywhere, and you don’t need a presidential permit to bring oil into the Gulf Coast.”
The eastern line is among $22 billion in projects the company has proposed or has under construction. TransCanada shares are trading near a record high in advance of an expected U.S. decision this year on the $5.3 billion cross-border segment of Keystone, which would link crude from the oil sands and North Dakota with Gulf Coast refineries.
“I suspect we’re looking at anything from a few weeks to a couple of months” for approval, Girling said. The U.S., which rejected the pipeline last year, is reviewing the project again after the route through Nebraska was changed to avoid the most environmentally sensitive parts of an aquifer. TransCanada first proposed the Keystone XL line in 2008.
Pipeline bottlenecks due to U.S. refinery downtime and increasing output are depressing prices of Canadian crude, which sold for 30 percent less than the U.S. benchmark in the fourth quarter, versus a 13 percent gap a year earlier. The gap narrowed to $28.50 a barrel yesterday, from $42.50 on Dec. 14, according to data compiled by Bloomberg. The discount makes Canadian crude the cheapest in the world, and will cost Alberta about C$6 billion ($6.01 billion) this year in foregone revenue, the provincial government has said.
West Texas Intermediate crude oil for March delivery settled at $96.62 a barrel on the New York Mercantile Exchange yesterday, while Western Canada Select, the benchmark for heavy oil-sands bitumen, closed at $68.12.
Girling, 50, expects to decide near the end of March on a project to convert part of the Calgary-based company’s cross-Canada gas mainline to oil and lay new pipe to the east coast by mid-2017. The eastern line, which would move as many as 900,000 barrels a day of western Canadian and U.S. crude to eastern refineries, “is economic,” Girling said.
“Production from the oil sands and U.S. production sources is expected to grow a couple million barrels a day, which means that we need, as an industry, probably three Keystones to get that oil to market,” Girling said in the interview, ahead of a trip to Washington this week for discussions on Keystone. “If Keystone doesn’t get approved, the oil will still get to the Gulf Coast.”
TransCanada, which is scheduled to report fourth-quarter earnings next week, is projected to post per-share profit excluding one-time items of 50 Canadian cents, compared with 52 cents a year earlier, according to the average of 12 analysts’ estimates compiled by Bloomberg. The company has missed estimates in five of the past six quarters.
TransCanada, which fell 0.5 percent to close at C$48.25 today in Toronto, has advanced 16 percent in the past 12 months. The shares climbed to a record of C$49.32 at the close on Jan. 28 as investors warmed to the company’s growth projects and the yields of pipeline and utility companies in general, said Juan Plessis, an analyst at Canaccord Financial Inc. in Vancouver.
The stock price should rise further if Keystone XL is approved and fall on a decision to delay, Plessis said in an interview.
TransCanada’s eastern conduit would help displace 600,000 barrels a day of oil imports in Canada, in part via the 300,000 barrel per day Irving Oil Corp. refinery in Saint John, New Brunswick, Girling said. Imports of crude are priced off the Brent contract, a U.K. benchmark that currently costs almost double the western Canadian price.
The company has offered producers and refiners delivery points in New Brunswick and Quebec, where there are two refineries, Girling said. The conversion and additions to the mainline, which may be built in stages to Montreal and then Saint John, will cost more than the company’s initial estimate of $5 billion due to projected rising costs by the time construction begins in 2015, he said.
“I’m very optimistic we will get the contractual support we will need and what I would hope is the pipeline goes all the way to Saint John,” Girling said.
The mainline project promises to lift prices of crude produced from Canada’s oil sands, the third-largest source of recoverable oil reserves in the world. Canadian oil production will rise by 300,000 barrels a day this year, according to Andrew Potter, a research analyst at Canadian Imperial Bank of Commerce in Calgary, who estimated Canadian producers are foregoing as much as C$33 billion a year in profits at current discounts, according to a Jan. 30 report. Oil sands output will rise to 3.2 million barrels a day by 2020, double 2011 figures, according to the Canadian Association of Petroleum Producers.
“We are in the depths of high differentials right now,” said Todd Kepler, an analyst at Cormark Securities Inc. in Calgary. “If Keystone does not go ahead, we need to have other egress points beyond 2014-2015 because of the ongoing big bitumen projects.”
U.S. President Barack Obama denied TransCanada a permit needed to build the cross-border line last year, after Congress forced a quick decision amid a review of the line’s environmental effect in Nebraska. Landowners and political leaders in Nebraska raised concerns a spill would pollute an aquifer that spans much of the state.
TransCanada split up the project to begin building the southern leg to Texas first and re-applied for approval of the northern portion after re-routing the line in Nebraska.
TransCanada’s eastern line will become more important should environmental and aboriginal opposition derail other oil pipeline plans across British Columbia to Canada’s Pacific coast, said Michael Formuziewich, who helps manage C$2.2 billion at Leon Frazer and Associates Inc. in Toronto, including TransCanada shares.
The Northern Gateway pipeline proposed to Kitimat, British Columbia, by Enbridge Inc., Canada’s largest pipeline company by market value, has been delayed until 2017 as opponents appear before Canadian regulatory hearings. Houston-based Kinder Morgan Energy Partners Inc. is proposing to expand its existing Trans Mountain pipeline to Vancouver and faces similar opposition over potential spills from the pipeline and oil tankers.
“If you look at the volume projection going out to 2020, you start saying Northern Gateway’s not going to happen, Kinder Morgan’s Trans Mountain will be delayed,” Formuziewich said. “Then the TransCanada mainline conversion is necessary, it’s a Plan B to the others.”
The eastern link would also boost revenue for TransCanada on the mainline, the nation’s largest pipeline system at 10,563 miles, from Alberta to Quebec. The new route would also reduce tolls for gas customers on a 35-year-old pipeline that has been operating at less than half its capacity.
TransCanada’s eastern plans may run into opposition in Quebec, where environmentalists such as the advocacy group Equiterre are girding for a fight against the development of the oil sands, Canada’s fastest-growing source of greenhouse-gas emissions. The Parti Quebecois government of Premier Pauline Marois is studying the effects of a competing plan from Enbridge to move Alberta oil to Montreal.
The mainline project across Canada is an example of “panic and urgency” within the energy industry, said Steven Guilbeault, Equiterre’s executive director.
“On some level they’re probably trying to hedge their bets,” Guilbeault said. “If Quebec isn’t the highest rate of opposition to the tar sands in Canada, it’s certainly up there with B.C.”