The pipelines transporting Western Canadian crude oil to US markets are full to overflowing. Space on the main lines is being rationed. As much as 250 Mb/d of new production is expected online during 2013. The price of Western Canadian Select heavy crude fell to nearly $40 under NYMEX WTI during the first week of January 2013. The pressure is on to build new takeaway capacity to Canada’s west coast. Today we look at the Trans Mountain Pipeline expansion project.
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We have previously discussed rising Canadian crude oil production and the challenge of finding new markets for it outside the US (see Production Stampede). The existing takeaway pipelines are already full. Last week for instance, operational issues led Enbridge to impose new apportionment on three of its main pipelines from Western Canada to the US. Apportionment reduces the actual volumes shippers can move from the amount nominated. The 796 Mb/d Line 4, between Edmonton, AB and Superior, WI the 450 Mb/d Line 67 between Hardisty, AB and Superior and the 609 Mb/d Line 6A between Superior and Griffith, IN were affected. Although Enbridge is working to restore capacity the larger problem is not going away anytime soon. As much as 250 Mb/d of new Canadian crude production is expected online during 2013. The market reacted by increasing the discount (i.e., decreasing the price) traders paid for the heavy Western Canadian Select (WCS) crude versus the NYMEX benchmark West Texas Intermediate (WTI). The chart below shows WCS traded at nearly $40 below WTI – the lowest since December 2007.
Source: CME Futures Data from Morningstar (Click to Enlarge)
Canada exported 2.3 MMb/d of crude oil during the third quarter of 2012 up 4.5 percent from the same period a year earlier according to the National Energy Board. Ninety eight percent of Canadian crude exports go to the US – the vast majority by pipeline. The routes that Canadian producers have sponsored to deliver crude to the largest US market – the Gulf Coast refining center – have run into trouble on two fronts in recent years. First pipeline expansion projects have been delayed (eg Keystone XL) by political opposition and second Canadian crude is facing increased competition for pipeline capacity from rising US domestic production. That production – particularly in North Dakota is increasingly taking up pipeline capacity that would otherwise have been available for Canadian crude. In the short term midstream companies like Enbridge are addressing the challenge by increasing capacity on existing pipelines out of Western Canada and reversing pipelines to move crude into Eastern Canada. In the longer term Canada needs to find new markets for its crude.
Outside of the US the most obvious export market for Canadian crude is Asia – via the West Coast. Chinese demand for crude oil increased year on year by over 10 MMb/d in November 2012. The Chinese are taking a particular interest in Canadian crude oil assets. The Chinese state run oil company CNOC recently paid $15 B for Canadian producer Nexen and they have pursued partnerships with other Canadian energy companies. Other Asian companies have also purchased Canadian assets – Malaysian state oil company Petronas purchased Progress Energy. Regardless of ownership - the barrier for any Canadian crude oil exports to Asia is that they first have to reach the West Coast.
Right now there is only one pipeline from the center of Western Canada’s crude production in Alberta to the West Coast – the Trans Mountain Pipeline. As we learned in our recent blog about ANS crude (see After the Oil Rush) most of the crude shipped on Trans Mountain today is consumed in British Columbia and Washington State. In the rest of this blog we examine plans to more than double the capacity of Trans Mountain over the next 4 years and in the next episode of this series we will look at the rival Northern Gateway project.
The Trans Mountain Pipeline is owned and operated by Kinder Morgan. The 700-mile pipeline runs from Edmonton to Burnaby, BC on the Puget Sound shore (see map below). Built 60 years ago in 1952 the current capacity is 300 Mb/d. The Pipeline delivers light and heavy crude oil and refined products from Edmonton to Burnaby, BC. It also receives crude oil at Kamloops, BC, and delivers refined products at Kamloops. At the BC end the pipeline delivers crude to the Chevron refinery at Burnaby and (via the Puget Sound pipeline) to four connected refineries in Washington State. A limited quantity of crude (78 Mb/d) is exported from the Westridge marine port.
Source: Kinder Morgan Presentation (Click to Enlarge)
Following ongoing requests from customers to increase the Trans Mountain pipeline capacity Kinder Morgan held open seasons in 2011 and 2012 to secure binding 15 and 20-year transportation agreements with domestic and foreign refiners. In April of 2012 Kinder announced plans to increase pipeline capacity by 450 Mb/d to 750 Mb/d. At the end of last week (January 10, 2013) Kinder Morgan announced that increased interest led to long term contracts being signed with 13 shippers committing to 700 Mb/d. As a result Kinder increased the proposed pipeline capacity again to 890 Mb/d.
The Trans Mountain project capital investment is budgeted at $5.4 billion. The map below shows that the expansion project basically involves twinning (called looping) the pipeline along the existing route. Portions of the proposed pipeline will be increased in diameter from 30 inches to 36 inches. The plan also involves expanding the dock facilities at the Westridge Terminal in Vancouver to two berths with 450 Mb/d crude loading capability. The vessel size will not be expanded from the Aframax tankers currently being loaded at Westridge. Larger tankers are not permitted in the Vancouver harbour, and are not under consideration for the expansion. Export tanker traffic out of Vancouver will increase by about 20 a month from the present level of 4 or 5.
Source: Kinder Morgan Open Season Map (Click to Enlarge)
The companies who have signed binding 15 or 20-year contracts include BP Canada, Canadian Natural Resources, Canadian Oil Sands, Cenovus Energy, Devon Canada Corp., Husky Energy, Imperial Oil, Nexen, Statoil Canada, Suncor Energy Marketing, Suncor Energy Products Partnership, Tesoro Refining & Marketing and Total E&P Canada.
Trans Mountain expects to file a Facilities Application with the Canadian National Energy Board (NEB) in late 2013, to get the proposed expansion authorized. The Application will initiate a comprehensive regulatory and public review process. If approved, the project would be operational in 2017.
Kinder Morgan’s recent increase in the capacity of the expansion project is testament to the pent up demand from Canadian producers anxious to reach the West Coast export market. Even if all the regulatory hurdles are crossed (and that is a big if) the pipeline will not be in service until 2017 – the same time frame projected for the rival Enbridge Northern Gateway West Coast pipeline project. Both of these pipelines are facing heavy resistance from environmental and first nation interest groups. In the next episode in this two part series we will look at Northern Gateway and then the impact that a green or red light for these West Coast pipelines will have on the Canadian crude market.
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