Enbridge’s Oil-Sands Pipeline Gains from Delays to Keystone XL Project
Enbridge Inc. (ENB) may win more customers and better financial terms for its new oil-sands pipeline project while an expanded government review delays TransCanada Corp. (TRP)’s rival Keystone XL line.
The U.S. State Department ordered further study of alternate routes for Keystone XL to avoid environmentally sensitive areas in Nebraska, where opposition to the project has grown. TransCanada’s 1,661-mile (2,673-kilometer) pipeline will carry crude from Canada to the Texas Coast.
The review “could be completed as early as the first quarter of 2013,” the State Department said in an e-mailed statement yesterday.
The delay may lead Canadian producers and U.S. refiners that signed up with Keystone XL to seek an alternative, Charles Drevna, president of the National Petrochemical and Refiners Association, said in a telephone interview.
“Refineries can’t wait however-many months to make decisions about where they’re going to get crude,” he said.
Enbridge, the largest Canadian pipeline company by revenue, said yesterday it has received sufficient customer commitments to move forward with its Wrangler and Flanagan South projects, two new pipeline segments that would connect Alberta’s oil sands to refineries on the Gulf Coast.
The Keystone delay, “definitely improves the prospects of the Wrangler project going forward,” John Auers, senior vice president of Turner, Mason & Co., a Dallas-based pipeline and engineering consultancy, said in an e-mail yesterday.
Producers decide whether to commit to shipping their crude on new pipelines based on the fees charged and their perceptions of whether the project will get built, Auers said.
If President Barack Obama’s administration forces TransCanada to re-route Keystone XL, “the chances for XL ever happening have significantly diminished, and I believe they will lose some, if not all, of the committed volumes they have already signed up,” Auers said.
TransCanada remains confident Keystone XL will eventually be approved, Chief Executive officer Russ Girling said in a statement yesterday after the State Department’s announcement. Though the delay “could have potential negative ramifications” for refiners counting on new supplies from Canada, he said.
“If Keystone XL is continually delayed, these refiners may have to look for other ways of getting the oil they need,” Girling said in the statement. “Oil-sands producers face the same dilemma - how to get their crude oil to the Gulf Coast.”
Enbridge’s project isn’t tied to Keystone XL’s fate, CEO Pat Daniel said during the Calgary-based company’s third-quarter earnings call this week. Jennifer Varey, an Enbridge spokeswoman, said in an interview yesterday that it’s “too early to comment” on how the State Department’s decision will affect Enbridge’s line.
The Keystone XL pipeline requires State Department approval because it crosses the U.S.-Canadian border.
Enbridge’s pipeline won’t be subject to State Department review because the section crossing the border already has been built. That section would form the first leg of the project, moving crude from Canada to Illinois.
The two new segments would be the Flanagan South line from the Chicago area to Cushing, Oklahoma, and the Wrangler line, which will move 800,000 barrels of crude a day from Cushing to refineries along the Texas Gulf Coast. Enbridge has partnered with Enterprise Products Partners LP (EPD) to develop the Wrangler line.
The new segments should face less opposition and regulatory review because they would follow routes where Enbridge already controls rights-of-way, Daniel said on the conference call.
Enbridge’s new pipeline system also would benefit from growing onshore production in states like North Dakota, where the company already has pipelines, Jackie Forrest, director of global oil for IHS Cambridge Energy Research Associates, said in a telephone interview. An oversupply at the Cushing, Oklahoma, oil storage hub also would help fill the pipeline’s capacity, she said.
Enbridge’s plan would bring Canadian crude to Texas by mid-2013, the same time period Calgary-based TransCanada originally planned for Keystone to be finished.
Producers and refiners are looking for the fastest course to market, said Carl Kirst, a Houston-based analyst with BMO Capital Markets. “If someone else can provide that sooner, that’s where the shippers will end up,” he said.
Some Nebraska landowners, environmentalists and politicians oppose Keystone because it would cross an aquifer that provides drinking water. A leak would foul water supplies and damage the Sandhills, marshy terrain made up of grass-covered dunes, they have said.
Nebraska lawmakers began a special legislative session Nov. 1 to consider passing a law that would require TransCanada to change the route.
While the Enbridge project won’t cross Nebraska, it will likely face other environmental opposition. Some environmental groups will oppose any pipeline transporting Canadian oil-sands crude, said Susan Casey-Lefkowitz, director of the international program at the Natural Resources Defense Council. Producing crude from sand laden with bitumen, a tar-like form of oil, generates more of the gases that are believed to create global warming, she said.
More Miles, Money
Rerouting would require 250 additional miles of pipe and increase the cost of the project by $1.6 billion, according to a State Department report. TransCanada has spent $1.9 billion on Keystone XL, BMO’s Kirst said. The potential loss of revenue from canceling the project would push TransCanada’s value down C$4 a share, or about 9 percent, he said.
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