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Enbridge crude volumes rebound quicker than expected on higher earnings

Highlights

Mainline crude volumes expected down by 9% in H2

Enbridge earnings fell just 5% in Q2

Enbridge owns 28% stake in DAPL pipeline amid pending shutdown

Houston — North American pipeline operator Enbridge said July 29 its crude volumes and finances rebounded more quickly than expected from the coronavirus pandemic, but that the recovery will progress more slowly in the second half of the year and that it will likely take until late 2021 to bounce back fully.

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Enbridge's Mainline system's liquids volumes plunged by about 15% in the second quarter and will remain down by an average of about 9% in the second half of the year. Mainline's volumes fell to 2.44 million b/d in Q2 from an average of 2.84 million b/d in Q1 which was less of a drop than feared, and will average about 2.6 million b/d for the second half of 2020, said CEO Al Monaco.

The Mainline system is Canada-based Enbridge's main crude oil artery that runs through a series a pipelines from Alberta to the Midwestern US and eventually to the US Gulf Coast. Enbridge recently added 50,000 b/d of Mainline capacity through optimization projects.

"We weathered the storm well, but we're monitoring the signposts very carefully," Monaco said during the July 29 earnings call. "We're cautious on the timing of a full return. We see a more gradual pace of recovery from here."

Concerns remain about rising coronavirus cases in the US and the potential for a second wave of the coronavirus in the autumn and into 2021, executives said.

Enbridge pointed out that North American gasoline demand collapsed by 44% in April at the peak of the coronavirus pandemic lockdowns, but remained down by only around 9% in July. Diesel demand only fell by 15% in April, but is still about 13% below average. However, jet fuel demand nosedived by 62% in April and is still down by 41%.

"Jet fuel is still way off as personal and business travel remains low," Monaco said.

He highlighted that US Gulf Coast heavy crude imports from Venezuela, Mexico and other regions continue to fall, reiterating the need for more Canadian heavy crude in the US. Despite ongoing volume declines, Midwestern and USGC refinery demand bounced back more quickly than expected, he said.

"This trend reflects the strong competitive position of the Midwest and Gulf Coast refineries that take Canadian heavy barrels off of our system," Monaco added.

Enbridge's Q2 net earnings only fell by a little more than 5% year on year to $1.23 billion.

Project developments

The biggest pending project is the planned, $6.75 billion Line 3 replacement project that runs from Canada to Wisconsin, including the largest pipeline segment in Minnesota.

Enbridge completed the $3.75-billion Canadian portion last year, but the project has continued to face regulatory and legal delays in Minnesota, including the recent regulatory approval deadline delay from mid-August to mid-November. State regulators decided they will hold an upcoming, contested public hearing in late August because of the amount of environmental opposition within the state.

Still, Monaco said the additional scrutiny ultimately should help solidify the regulatory certainty for the project, despite the delays. Construction should take up to nine months once the final approvals ultimately are obtained.

The smaller Line 5 tunnel replacement project under the Great Lakes of Michigan also is progressing despite state opposition, he said, and project completion isn't expected until late 2024.

However, the eastern leg of the dual Line 5 crude and NGL pipeline system remains shut down after damage was detected in June and the Michigan governor sought a total shutdown. While the unharmed western leg was allowed to resume operations after a court fight, Enbridge is still working with the US Pipeline and Hazardous Materials Safety Administration to determine the timing of a safe restart of the eastern pipeline.

Monaco insisted that Line 5 is critical to the entire region, highlighting Michigan's reliance on the pipeline for its propane for heating oil, and its crude oil to supply gasoline, diesel and jet fuel in the state.

Another big looming fight is the court-ordered shutdown of the Dakota Access Pipeline. Enbridge isn't the operator, but does own a 28% stake in the 570,000 b/d pipeline system from the Bakken Shale. An appeal is pending in a federal court.

Enbridge executives said they're concerned and the acknowledged the potential detrimental effects, but they said Enbridge is well positioned to mitigate the loss of the crude capacity because of its extensive network of crude pipelines.

"We can mitigate, and we should be in pretty good shape," said Enbridge Executive Vice President Vern Yu.

He said Enbridge could move close to 200,000 b/d of incremental crude increases on other systems.

As for other projects, Enbridge completed an optimization expansion of its Express Pipeline to add 25,000 b/d of crude capacity from Alberta to Wyoming.

With federal regulatory in hand, Enbridge plans to begin construction later this year on its $150-million Cameron Extension project to connect its Texas Eastern gas pipeline to Venture Global's planned Calcasieu Pass LNG facility in Louisiana.

But Enbridge does expect lower revenues and volumes from its Texas Eastern system this year after an explosion in May in Kentucky.