Enbridge Inc. will join Energy Transfer Partners LP to convert part of the Trunkline natural gas system to oil, making it the first pipeline capable of sending crude to the eastern Gulf Coast from the Midwest.
The project will handle 420,000 to 660,000 barrels a day and span more than 700 miles (1,100 kilometers), Calgary-based Enbridge said in a statement today. Energy Transfer, which owns the system with Energy Transfer Equity LP, has previously announced plans to convert it at a cost of about $1.5 billion.
Pipeline companies are seeking ways to transport more crude from expanding production in the Bakken Shale formation in North Dakota and oil-sands projects in Canada. Enbridge and Enterprise Products Partners LP announced a reversal of the 500-mile Seaway pipeline to the Houston area from Cushing, Oklahoma, last year. TransCanada Corp. is continuing with plans to build the Keystone XL pipeline to transport Alberta bitumen to U.S. refiners.
“Together with our western Gulf Coast access program, which includes the expanded Seaway pipeline, this new project would provide western Canadian and Bakken producers with access to the largest refining center in the world,” Al Monaco, chief executive officer of Enbridge, said in the statement.
Subject to federal approval and sufficient customer interest, Trunkline shipments of crude would begin in 2015 from Patoka, Illinois, to the St. James, Louisiana, hub which connects to refineries in the New Orleans area.
Enbridge will invest $1.2 billion to $1.7 billion for its 50 percent share of the project cost, Monaco said today.
“This is another step in the process of bringing inland crude to where it needs to go and getting value for producers in the upper Midwest,” Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania, said in a phone interview.
As part of the project, Enbridge will build a lateral pipeline running from Boyce, Louisiana to St. James.
Ten refineries with the ability to process a combined 2.44 million barrels a day in the New Orleans and St. James areas, or about 28 percent of U.S. Gulf Coast refining capacity, may receive crude oil shipments from the pipeline, data compiled by Bloomberg show.
The largest terminals with the possibility of connecting to the line are operated by Plains All American Pipeline LP, NuStar Energy LP and Shell Pipeline Co.
Heavy oil prices in Canada have been depressed as pipeline congestion limits refinery and pipeline operators from transporting products out of the region and into more profitable areas including the Gulf Coast.
“The Gulf Coast is one of the largest refinery centers in the world, and the eastern Gulf market makes up more than a third of that capacity at over 3 million barrels per day,” said Monaco. “It is both a heavy and a light crude oil market where barrels receive premium pricing. Up until now, this market has not been directly accessible to western Canadian and Bakken crude producers.”
Western Canada Select slumped to a record $42.50 below West Texas Intermediate in Cushing, Oklahoma, on Dec. 14, before strengthening to $23.50 a barrel yesterday. WTI’s discount to Brent oil in Europe fell as low as $19.90 a barrel today.
Those spreads may narrows as the cheaper oils flow to refineries along the Gulf Coast, bringing Canadian producers closer to the world oil market, according to Andy Lipow, president of Lipow Oil Associates LLC.
“Once you’re on the Gulf, the pipeline grid expands to get oil both to Texas and Louisiana refineries,” Lipow said by phone from Houston. “From there you can go in a number of different directions.”
Exporting Canadian crude from the U.S. Gulf Coast may be in the longer-term plan once pipeline projects are completed, Schork said.
“In a perfect world you get it down there and there’s enough offtake in the refining market that you can get those barrels waterborne,” Schork said.
The U.S. Commerce Department’s Bureau of Industry and Security regulates licenses to export crude oil. Bureau regulations say it will approve exports of foreign origin crude that has reached the U.S. so long as it has not been commingled with oil of U.S. origin.
The Louisiana Offshore Oil Port, the largest waterborne petroleum import terminal in the U.S., has discussed building a new dock to export crude oil from the Louisiana coast, said Barb Hestermann, a Covington, Louisiana-based spokeswoman for the port.
“It’s something that we’ve talked about over time, but we have no plans right now,” she said.
Enbridge’s conversion of Trunkline follows a number of potential projects also aiming to relieve the heavy glut of oil in Alberta and Cushing.
Plains All America Pipeline LP, Marathon Petroleum Corp. and BP Plc. may reverse the Capline pipeline, a pipe with the capacity to carry 1.2 million barrels a day from St. James to Patoka, while TransCanada anticipates building the Keystone XL line to transport Alberta bitumen to U.S. refiners, according to the companies.
“The Trunkline project preempts the much discussed reversal of Capline and possible Keystone permit,” Lipow said. “Should Capline decide to reverse and Keystone get approval, this is now competition for those systems and we’ll see much more flow to the Gulf.”
Shell also completed the first phase of a reversal of the Houston-Houma pipeline last month to transport about 325,000 barrels of domestic oil from East Houston to Nederland and Port Arthur, Texas. The company plans to reverse the rest of the line to Houma. The line also includes a 260,000-barrel-a-day line that runs from Houma to St. James.
“Getting the barrels to Houston or New Orleans is half the battle,” Schork of Schork Group said today. “Once it gets down there, the question comes to demand.”
Enbridge fell 0.21 cent to $43.94 a share in New York, while Energy Transfer rose 0.13 cent to $47.16 per share.