Saved by the pipe

Western crude could bring bigger profits to eastern refineries

When the president of the association that represents the refining sector in Canada calls plans by its two biggest pipeline companies to move more western Canadian crude oil to refineries in Ontario, Quebec and Eastern Canada a “win-win,” that pretty well says it all.

That is how Peter Boag, who heads the Canadian Fuels Association (CFA, formerly the Canadian Petroleum Products Institute), views plans by TransCanada Corporation to spend about $5 billion to convert its mainline gas pipeline to carry crude from western Canada and the western United States to Montreal, as well as plans by Enbridge Inc. to reverse the flow of its existing Line 9 to carry western crude to Ontario and Quebec and vastly expand its existing system to move more western U.S. and Canadian crude.

Weaning themselves from expensive foreign oil by gaining improved access to domestic streams could be just the ticket for Canadian refiners—who’ve never had the advantages of scale enjoyed by Gulf Coast refiners—to remain viable contributors to Canada’s economy.

“I think better access to western Canadian crude for eastern Canadian refineries is desirable, both in terms of diversified markets for crude produced in Canada and in terms of diversified crude access for refineries,” said Boag, whose organization represents most of the refining sector in Canada.

Canadian refineries disadvantaged

He said the nine refineries in eastern Canada are now at a cost disadvantage, particularly those in Quebec and Atlantic Canada, which rely almost totally on imported Brent crude, priced at least $20 higher per barrel than West Texas Intermediate–indexed crude from western Canada (differentials between bitumen and heavy oil and light crude can add $10 per barrel and more to that).

Three refineries in Atlantic Canada—in Dartmouth, N.S., Saint John, N.B., and Come By Chance, N.L.—and two in Quebec (both in Montreal) rely exclusively on expensive crude imported from the North Sea, Africa or the Middle East.Four refineries in Ontario have access to either domestic or international crudes, but generally rely on the more expensive imported streams.

And now the push is on to get more crude from areas like the Bakken in North Dakota and Saskatchewan, as well as light and oilsands crude from western Canada to eastern Canadian, Midwest and eastern U.S. markets.

Opposition from environmentalists, aboriginals and others to large pipeline projects such as Enbridge Inc.’s Northern Gateway, the expansion of the existing Trans Mountain Pipeline, or TransCanada’s Keystone XL line, threatens to delay those projects for years.

But both Enbridge and TransCanada have announced other projects aimed at moving more western Canadian and western U.S. crude to eastern Canadian and U.S. refiners—the win-win Boag is referring to.

The projects that have attracted the most mainstream media attention, as well as support from politicians such as Natural Resources Minister Joe Oliver, are plans by TransCanada and Enbridge that would reconfigure existing lines to move western crude east.

TransCanada has announced plans to spend about $5 billion to convert its main gas pipeline—which, since the 1950s, has shipped natural gas east—to instead carry crude oil.

Company spokesman Grady Semmens says plans for the conversion, which could see the line carrying 500,000 to one million barrels of crude daily to Ontario and then on to Montreal, “technically and economically feasible.”

The company has also examined a related project to build 75 kilometres of new pipe to deliver crude from the end of the Mainline in Quebec to the St. Lawrence Seaway, where it could be moved by barge to Irving Oil Ltd.’s refinery in Saint John, N.B.

A simple fix

Semmens says the overall project would be “relatively simple” and would involve more pump stations, monitoring stations and other infrastructure. “Eighty per cent of the pipeline is in place,” he says.

“We’re now at the stage of studying the commercial viability of the project,” he says. “We’re talking to shippers to line up contracts. We hope to make an announcement sometime in the new year about whether to proceed.”

The gas line has become uneconomical because of cheap shale gas flowing into Ontario from finds in the United States.

Alex Pourbaix, president of energy and oil pipelines for TransCanada, told analysts in October that the company would have the option of just shipping crude to Montreal.

“The obvious first market for an eastern Mainline conversion would be the eastern Canadian refineries and U.S. eastern seaboard refineries,” he said, adding that they are “overwhelmingly configured” to process lighter crudes.

“Longer term, there’s obviously the potential to take heavy crudes offshore, or even potentially to see some investment in those eastern refineries to run the heavier Alberta crudes.”

Canada’s historic crude oil pipeline company, Enbridge, also has announced ambitious plans that would transport more western Canadian and western U.S. crude to eastern Canada and the United States.

One project likely to proceed soon—an application was filed with the National Energy Board (NEB) in October—is its plan to reverse the flow of crude on the 639-kilometre section of Line 9 from the North Westover terminal in Ontario to the Montreal terminal (Line 9B). Enbridge also applied to expand the overall capacity of Line 9 from Sarnia, Ont., to Montreal to about 300,000 barrels per day from the currently approved 240,000 barrels per day. And it has applied to revise the Line 9 tariff to allow for the transport of heavy crude on that line.

Reversing a reversal

Earlier in 2012, the NEB approved a stand-alone application from Enbridge for the reversal of the 194-kilometre segment of Line 9 between Sarnia and the North Westover terminal (Line 9A).

Line 9, an existing 30-inch-diameter pipeline, was placed into service in 1976 and, ironically, originally flowed in an eastward direction. The flow of the pipeline was reversed in 1999, and it now transports crude imported from the North Sea, West Africa and the Middle East to Ontario refineries.

The company said it decided to go ahead with the reversal plans after receiving requests from eastern Canadian refineries to have access to western Canadian and Bakken crudes.

Enbridge spokesman Graham White says the company will need to invest in additional pumps and skids and will need to inject a drag-reducing agent in the line to increase its capacity. The cost of the reversal, he says, will only be about $70 million. “It’s not an expensive project.”

He says the company expects the NEB to call a hearing into the plans—opposed by some environmental groups who claim it is a ploy to export oilsands crude off of the Canadian east coast—but still expects approval in 2013 and in-service completion of the reversal by early 2014.

White says there are no plans to export crude from the line. “It will primarily carry light crude from the Bakken and western Canada [to refineries],” he says. “We do have a request from Suncor [Energy Inc.] to carry some heavies on the line, and we want to make sure it is able to carry heavier products.”

The Line 9 and Line 9B projects are the smallest of a handful of capital investments designed to help Enbridge carry more western Canadian and western U.S. crude to eastern Canada, the eastern and Midwestern United States and the U.S. Gulf Coast.

But an economic impact study commissioned by Enbridge has shown that even the Line 9 project can bring large benefits to the Canadian economy.

Jobs impact

For instance, it showed that the remaining 1,100 jobs in the Quebec refining industry would be protected, along with thousands others in the related petrochemical industry. It showed that bringing Canadian crude to the province would add $23.5 billion to Quebec’s gross domestic product over the next 30 years, increase provincial tax revenues by $2.8 billion and federal revenues by $3.5 billion.

The project would also create 3,250 person-years of direct and indirect jobs in Quebec and 1,969 in Ontario.

The study showed the benefit to Ontario refineries from lower-priced feedstock would add $960 million to the provincial economy over the next 30 years.

Other projects planned by Enbridge would move even more lower-priced and abundant western Canadian and western U.S. crude to eastern markets.

In December, the company announced it had received support from shippers and refiners to proceed with a $6.2-billion program to expand access to markets for growing volumes of North Dakota and western Canadian light oil production.

Its light oil–access program will provide increased pipeline capacity on Enbridge’s North Dakota regional system, further expand capacity on its U.S. mainline system, enhance Canadian mainline terminal capability, upsize the eastern access program and provide additional access to Midwestern U.S. refineries.

The $3.4-billion program will provide access from the Enbridge system to refinery markets in Ontario, Quebec and the U.S. Midwest for an additional 400,000 barrels per day of light oil, Enbridge said. Projects announced earlier in 2012 include a $2.7-billion, eastern-access program (some of which is incorporated in the light oil–access program) and an upsized $5.8–billion, Gulf Coast–access program that will boost delivery capacity from Flanagan, Ill., to Cushing, Okla., to 775,000 barrels per day and from Cushing to the Gulf Coast to 850,000 barrels per day.

“Some crude could go to the U.S. Gulf Coast or to eastern U.S. refineries,” Enbridge’s White says. “It’s all connected.”

The projects will be available for service at varying dates from 2014 to 2016 and will require regulatory approval in the United States.

The CFA’s Boag says about 85 per cent of crude feedstock now refined in Ontario originates from western Canada, and most refineries in the province are capable of processing heavier crudes expected to come in the future from the oilsands.

Roger McKnight, a senior petroleum advisor with Oshawa, Ont.–based En-Pro International Inc., says some refiners might have to invest in more coking capacity as crude volumes from the oilsands increase, creating the need to remove sulphur from heavier crudes. However, he says the pipeline companies’s plans to ship more domestic crude to eastern Canada refiners is crucial.

“If the Shell [Canada Ltd.] refinery in Montreal was still operating and it had access to domestic crude, it might still be in business,” he says.

Royal Dutch Shell plc closed its 130,000-barrel-per-day, Montreal-area refinery two years ago.

McKnight says consumers should benefit from access to domestic crude too, pointing out that pump prices in Ontario, where refiners can access western crude, are about eight cents per litre less than in Quebec and the Maritimes.

Saving domestic refiners

McKnight says it’s unlikely there will be new refineries built in North America, but a shift towards processing more domestic crudes would likely save more of the refineries that are now in operation. At one point, there were over 40 refineries in Canada, and now there are 18.

Michael Ervin, principal for MJ Ervin & Associates Inc. of Calgary (a division of Ontario-based refinery and petroleum marketing consulting firm Kent Marketing Services Limited), says the Enbridge Line 9 reversal project and others recently announced by the company are among the projects that will make economic sense for the next five to seven years, particularly for refiners in Quebec, with some benefits to Ontario because of greater access to western Canadian and U.S. crude.

But he says the TransCanada plans, which will take longer to bring about, may be dashed by what he sees coming in the future.

Pointing to “tremendous growth” in new refining in India, China and the Middle East, he says the differential between Brent crudes and West Texas Intermediate crudes will narrow in the next few years and eventually disappear.

“There’s one new refinery in India that will process 700,000 barrels daily, and there are other large refineries being built in China and the Middle East,” he says. “That doesn’t bode well for North American refining long-term.”