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Enbridge raises Line 3 Replacement project costs, touts confidence as protests escalate

Highlights

Line 3 Replacement capital costs rise to $7.3 billion

Renewed interest for SPOT offshore, crude-exporting terminal

Enbridge calls itself "bridge to the energy future"

Houston — Enbridge increased the cost of its large Line 3 Replacement project by nearly $1 billion and touted its confidence in bringing the heavy oil sands system online in late 2021 amid escalating environmental protests and heightened political scrutiny under the new Biden administration.

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Enbridge said during its Feb. 12 earnings call that capital costs for its major Canadian heavy oil artery to the US have risen from more than $6.5 billion to $7.3 billion because of more construction time concentrated in the snowy winter weeks, additional environmental mitigation, enhanced coronavirus protocols and higher regulatory and legal costs.

The Line 3 Replacement project would more than double crude pipeline capacity from 370,000 b/d to 760,000 b/d as it moves Canadian crude from Alberta to Superior, Wisconsin. The pipeline runs more than 1,000 miles, including its largest 337-mile segment in Minnesota where construction is currently concentrated, and would serve as a larger avenue to move more heavy crude from Canada to the Midwestern US and, ultimately, to the major refining corridor along the US Gulf Coast.

"This increase really stems from our revised execution plan," Enbridge CEO Al Monaco said. "So, not surprising, costs have come up."

However, with President Joe Biden having essentially canceled the competing Keystone XL Pipeline on the first day of his presidency, the Line 3 project is now on the precipice of becoming the epicenter of the anti-fossil fuel movement in the US as opponents aim to pressure Biden into action. The Canadian portion of the pipeline is already complete and the US portion is expected to come online in the fourth quarter, making for a race against the clock.

Energy analysts are counting on the pipeline project to be completed, but Biden's win against the industry-friendly Donald Trump has kept it from becoming a certainty. While Biden publicly opposed the more famous Keystone XL Pipeline project in his campaign, he has not weighed in on Line 3.

As recently as Feb. 4, construction temporarily was impeded by protesters locking themselves to barrels of concrete and even a piano.

Monaco did not address the intensifying blockade efforts during the earnings call, but he cited the exhaustive six-year regulatory and permitting process, as well as the recent rejections in federal court of lawsuits seeking to stop the pipeline project.

Touting the safety of the Line 3 project, as well as more renewable energy investments by Enbridge and a recent net-zero emissions goal by 2050, Monaco also emphasized that Enbridge is now promoting itself as the "bridge to the energy future."

"It's still early days, but I think so far things are going better than we'd hoped for," Monaco said of the Minnesota construction, later noting, "Post-Line 3 into 2022, we're going to have a lot of cash coming at us."

Looking forward

The 2022 timing fits with the anticipated global crude demand recovery from the ongoing pandemic.

"We're cautious near term, but very optimistic about the long-term fundamentals," Monaco said. "All of this lines up well with our USA Gulf Coast strategy."

Enbridge also recently completed expansion of its Wisconsin-to-Illinois Southern Access crude oil pipeline from 996,000 b/d to 1.2 million b/d, but is waiting until late in 2021 to bring the extra capacity online to coincide with the completion of the larger Line 3 pipeline project.

The roughly $500 million expansion of the pipeline runs about 500 miles from Superior, Wisconsin, to Flanagan, Illinois, and is part of Enbridge's larger Mainline network, including Line 3, to move Canadian crude to refining hubs in the Midwest and the US Gulf Coast.

For instance, Enbridge said Mainline volumes fell sharply from 2.84 million b/d in the first quarter of 2020, but had rebounded to 2.65 million b/d in the fourth quarter, and are estimated at more than 2.7 million b/d in the current first quarter of 2021.

Because of limited pipeline capacity out of Canada, crude-by-rail exports hit an all-time high of 411,991 b/d in February 2020 before plunging to an eight-year low of 38,867 b/d in July as the pandemic took hold. Exports have since rebounded to 173,095 b/d in November, according to the Canada Energy Regulator, as production has picked back up, and the Line 3 project is expected to alleviate much of the concern about pipeline capacity.

With heavy crude production down in countries such as Venezuela, there is more US and overseas demand for heavy Canadian crude oil, Monaco said.

As such, he said, there has been renewed customer interest in the stalled Sea Port Oil Terminal project, called SPOT, with Enterprise Products Partners to build a deepwater, oil-exporting terminal offshore of the Houston Ship Channel.

"You want to have the optionality of moving that crude offshore," Monaco said. "The fundamentals are really lining up nicely for us."