From the oil industry’s perspective, on some days Canada has a $30 million-a-day problem. On other days, it’s a $40 million-a-day problem.
It’s the penalty that Canadian oil producers pay for soaring oil production in North America, without the means to move the product readily to market. That oil is tied up in landlocked transportation bottlenecks, saturating the local market and keeping inland North American prices 15 per cent or more below the world price.
That translates into $15 or $20 a barrel, depending on the day — and at current production levels it means getting tens of millions a day below world prices for oil.
For the moment, there’s no way around the bottlenecks
“It’s going to be tight for a year or two,” says Greg Stringham, vice president of the Canadian Association of Petroleum Producers (CAPP).
Now, the scramble is on — to the dismay of environmentalists — to build more pipelines to feed oil-hungry markets.
Canada produces 2.7 million barrels a day, and exports 2 million of them — almost all to the U.S. About 300,000 barrels flow through the Kinder Morgan pipeline to the west coast, where they’re exposed to world prices.
But most of the rest flows south to inland facilities, such as the huge Cushing oil terminal in Oklahoma and other hubs in the western states.
Those Canadian exports are due to increase, swiftly and dramatically, because of booming production in Alberta’s oil sands.
CAPP’s latest projections show the current 2.7 million barrel-a-day production rate growing by a third, to 3.6 million barrels a day, by 2015, and soaring to 5.4 million barrels a day by 2025. Most of that will continue to flow into the U.S. market.
But that’s not all. U.S. production isn’t standing still. Oil companies have perfected the art of extracting “tight oil” from vast shale deposits centred in North Dakota.
Tight oil production, negligible until five years ago, is projected to grow to 1.3 million barrels a day by 2027, according to the International Energy Agency (other estimates give even higher figures).
That oil is flowing into the same pipeline system that carries Canadian oil into the western U.S.
The problem occurs because so much oil is flowing into landlocked hubs like Cushing, while there’s limited pipeline capacity to get it to the coast, where it could trade on world markets.
That has created a separate, interior North American price that’s significantly lower than the world price. On Friday morning, for example, the benchmark international Brent spot price was over $117 a barrel; at Cushing, the spot price was under $97.
The pipeline solutions
If so much oil is flowing into the western U.S., how does it get out?
The Eastern route: The fastest solution at hand, says Stringham, is made in Ontario and other eastern provinces.
A pipeline owned by Enbridge Inc. that once carried imported oil westward from Montreal to refineries in Sarnia is being reversed, to carry western Canadian oil east.
The company has clearance to reverse the pipe, called Line 9, from Sarnia to Hamilton, and has asked for approval to reverse the rest of the line. Ultimately, it could connect to Canadian and U.S. refineries on the east coast.
Atlantic Canada and Quebec use about 680,000 barrels of oil a day — most of it imported. The pipeline could carry about 300,000 barrels a day, displacing imports with Canadian oil.
That’s only part of the solution; but because the pipe’s already in the ground, it’s the fastest, says Stringham. With approval from the National Energy Board, oil could be flowing east by the end of the year, he said.
A second pipe that’s already in the ground could also flow oil east. TransCanada has proposed converting its under-utilized natural gas pipeline to oil. It could carry 500,000 to 1 million barrels a day to eastern Canada, if the $5 billion project goes ahead.
The southern route: The big prize is the oil market in the Gulf of Mexico. But to get there from the Canadian west, most crude has to clear Cushing.
Enbridge is planning a new pipeline from Flanagan, near Chicago, to Cushing that will carry 600,000 barrels a day — some of it originating in Canada. The new line will parallel an existing Enbridge line.
The northern leg of TransCanada’s Keystone XL pipeline also proposes to pipe Alberta oil south to Cushing, though it continues to meet furious opposition from environmentalists.
TransCanada has rerouted the line around sensitive natural areas in Nebraska, winning the state’s backing, but the project still requires presidential approval.
Getting to Cushing isn’t the whole battle, however. Getting out of Cushing remains an issue.
For the moment, there’s more oil than pipeline capacity out of Cushing. That bottleneck is the reason for the relatively low internal U.S. price of oil. Not surprisingly, pipeline companies are busy looking to add new capacity.
One project made in Canada: The southern leg of TransCanada Corp.’s Keystone XL pipeline. It’s already under construction, and when completed late this year will carry 700,000 barrels a day south — rising eventually to 830,000 barrels.
The Seaway Pipeline — in which Calgary-based Enbridge Inc. is a partner — used to flow north but has been reversed. It has just started flowing, and is slated to carry 400,000 barrels a day out of Cushing.
The new pipelines out of Cushing won’t increase volumes of Canadian oil going south, says Stringham,
“What it does is help free up the bottleneck that allows the (international) the pricing to permeate back across North America.”
It may not be enough to bring North American prices back up to parity with the world price, but it should narrow the gap. Good news for oil companies — perhaps not such good news for North American drivers.
The western route: Looking westward, Canadian oil producers now see a single pipeline connecting to the west coast, operated by Kinder Morgan, which carries 300,000 barrels a day. The company wants to build a new pipe along the existing route, expanding capacity to 900,000 barrels day.
In addition, Enbridge is seeking permission — against stiff public and aboriginal opposition — to build the Northern Gateway, a new 500,000 barrel a day pipeline to Kitimat on the B.C. coast.
The rail solution: The Dakota region at the heart of the burgeoning shale oil sector isn’t well served by pipelines; instead, oil companies are shipping by rail.
“We’re seen it get up to the range of about 200,000 barrels a day,” says Stringham.
It’s a significant number, but nowhere close to the volumes being added by new and proposed pipelines.
Canadian oil producers have also taken notice — but again, says Stringham, the numbers are relatively small. At the most, he says 50,000 barrels a day are moving by rail, a small share of the 2.7 million barrels of daily production.
The green solution: Environmentalists, many of whom harbour a basic aversion to the oil industry, argue that building pipelines solves the wrong problem.
The real issue, argues Keith Stewart of Greenpeace, is how to develop a sustainable energy system that won’t trigger catastrophic global warming. The billions being contemplated for new pipeline investment should instead be earmarked for environmentally benign green energy projects, Stewart argues.
“Building a new pipeline is an investment in large increases in greenhouse gas emissions for the next 50 years,” he said in an interview. “Rather than actually trying to solve the problem, it’s actually making it significantly worse — the problem being the need to transform our energy system.
“We don’t need new ways to pump carbon into the atmosphere faster. We need ways to meet our energy needs without de-stabilizing the climate.”
Green groups, farmers, first nations and others have been fighting most of the proposed pipeline expansions — so far with limited success. But many of the proposed pipelines still await final regulatory or political approval, including the northern section of Keystone XL, Northern Gateway, and the eastern section of Enbridge’s Line 9.