That other Canadian pipeline project

As its Keystone XL pipeline project continues to remain stuck in the quagmire of US politics, TransCanada gave details about plans to build a pipeline from Western Canada to Eastern Canada.

 

The so-called TransCanada Energy East line would have the capacity to bring 1.1 million barrels per day (bpd) of the crude stuff from the resource rich western provinces to refiners in the east. The idea is to replace foreign imports for the refineries in Quebec (as much as 92% in the state) and Atlantic Canada.

 

The pipeline, which would cost CAD$12 billion, shall run from Hardisty, Alberta, to a new receptor terminal in St John, New Brunswick. Upon completion, not only will the project reduce reliance on Middle Eastern and East African imports (thought to be in the region of 750,000 bpd for Atlantic Canada), but St John could actually become an exporting terminal for unused surplus. For all intents and purposes, this would be a colossal endeavour. Surely, the approval process won’t be as slow as Keystone XL, as the project enjoys support in the Canadian corridors of power and finds flavour with the public at large. Furthermore, the TransCanada Energy East pipeline would link about 3,000km of an already-built natural gas pipeline with roughly 1,400km of newly constructed pipeline.

 

A spokesperson for TransCanada said the company was confident of supplying oil to Quebec refineries by late 2017 and further on to New Brunswick by 2018. At a press conference detailing the plans, TransCanada's Chief Executive Russ Girling said, "This is a historic opportunity to connect the oil resources of western Canada to the consumers of eastern Canada, creating jobs, tax revenue and energy security for all Canadians for decades to come."

 

Indeed Sir! Reversing the east coast oil deficit into an export surplus would be one hell of 'crude' story. Canadian oil production is tipped to more than double by 2025 from its current level of 1.5 million bpd. Everyone from Saudi Arabia to the Venezuela is casting a nervous eye on Canada’s rise while domestic realisation is spurring projects such as the East to West pipeline. However, the Obama administration remains oblivious, or shall we say exceedingly slow, in letting the USA respond to this seismic shift by approving Keystone XL!

 

A summer approval was expected but has not materialised so far. Instead we are told that the US State Department will issue a final report on the project before the end of the year. On a related note, a report published by Moody’s late last month noted that most Canadian E&P companies are protected from volatile price differentials for heavy oil.

 

To provide context, the heavy oil differential is the difference in price between WTI, and the price at which heavy oil is sold, most commonly referenced to the Western Canadian Select (WCS) benchmark. These discounts have been volatile and sometimes pretty wide, especially since Q2 2012.

 

"We expect the differential to remain highly volatile. Even so, most producers of Canadian heavy oil draw some protection from their diverse products, low cost structures, or integration," said Moody's Senior Vice President Terry Marshall.

 

"The possible lack of significant new pipeline capacity to reach export markets and eastern Canadian refineries will have an impact on the growth of Canadian oil producers and will likely widen our $20 assumption for the differential," Marshall added. "This uncertainty will be a key consideration in upward rating movements for Canadian producers until the addition of incremental takeaway capacity is apparent."

 

According to the ratings agency, the pure bitumen producers such as MEG Energy and Connacher Oil and Gas will remain the hardest hit by wide differentials, because highly dense bitumen requires about 35% dilution and condensate generally sells at prices above WTI. The diluted bitumen then sells at the price of heavy oil.

 

Mining oil sands operations that upgrade their bitumen, such as those held by Canadian Oil Sands Limited (COSL), Canadian Natural Resources Limited (CNRL) and Suncor Energy, have no exposure to the heavy oil differential. That's because these operations produce synthetic crude oil (SCO), a light oil product that trades around WTI prices.

 

According to Moody’s, companies that produce a high component of heavy oil, such as Baytex Energy, lie between these two extremes, with full exposure to the differential, but minimal need to buy costly diluent in order to ship their product.

 

The largest companies, including CNRL, Suncor Energy, Husky Energy and Cenovus Energy, sell a diverse mix of products, limiting their exposure to the differential, the agency noted. Furthermore, Suncor, Cenovus and Husky all draw an additional advantage from mid-continent downstream refinery operations, which benefit from wide differentials.

 

The discount on the heavy crude reflects a supply and demand relationship based on the available heavy oil refinery capacity, and infrastructure constraints and bottlenecks, Moody's noted.

 

As heavy, light oil and SCO all utilise the same finite pipeline space, a back-up in the system affects all products to varying degrees. For what it’s worth, this underscores the importance of TransCanada’s latest pipeline foray.

 

Away from Canada, the US EIA says the country’s crude oil output could exceed imports as early as October; the first such instance since February1995. In its monthly Short-term Energy Outlook, the EIA also said US crude oil production increased to an average of 7.5 million bpd in July 2013; the highest monthly level since 1991.

 

The report also raised its forecast for Brent, and noted that spot prices will average US$104 a barrel over the second half of 2013, marginally above the $102 forecast last month. The forecast for 2014 was left unchanged at $99.75 per barrel. WTI will average $96.96 a barrel this year, the EIA said, up from the July projection of $94.65. The US benchmark grade will average $92.96 in 2014, up from the previous month’s estimate of $91.96. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.