Getting new oil pipelines built in Canada has become a problem. Producers are keen on expanding their customer base outside the US, eyeing refiners in Asia and Europe. To reach those markets,producers need pipeline access from Alberta to coastal terminals, but they have faced a lot of pushback. Now it’s Kinder Morgan’s 590,000 b/d Trans Mountain pipeline expansion, which would deliver crude to British Columbia. Kinder Morgan is considering pulling the plug on the pipeline expansion as of May 31 because of a lack of regulatory certainty.
S&P Global Platts editors Jeff Mower and Ashok Dutta examine the major issues and the possible market implications.
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ASHOK DUTTA: Welcome to the Commodities Spotlight Podcast from S&P Global Platts. I’m Ashok Dutta in Houston and I’m senior oil news editor.
JEFF MOWER: And in New York I’m Jeff Mower, Editorial Director, Americas oil news.
AD: Getting new oil pipelines built in Canada has become a problem. Canadian oil producers are keen on expanding their customer base outside of the United States, eyeing refiners in Asia and Europe. In order to reach those markets, producers need pipeline access from Alberta to coastal terminals, where seaborne vessels can pick up the crude for export.
JM: Pipeline companies have announced plans to build and expand lines. But they are getting a lot of pushback. This has been going on for a couple of years. In 2016, the then newly elected liberal government turned down Enbridge’s 525,000 b/d Northern Gateway pipeline, which would have delivered crude to the West Coast, citing the line’s impact on the Great Bear rainforest in coastal British Columbia.
AD: And last year, Trans Canada, citing carbon-related issues, said it would not proceed with its 1.1 million b/d Energy East pipeline, which would run to the Atlantic Coast.
JM: Now it’s Kinder Morgan’s 590,000 b/d Trans Mountain pipeline expansion, which would deliver crude to British Columbia. Kinder Morgan is considering pulling the plug on the pipeline as of May 31 because of a lack of regulatory certainty. While the pipeline expansion has received federal approval, British Columbia is rejecting it on environmental grounds.
AD: And Alberta is fighting back. The Alberta government last week tabled a new piece of legislation – called Bill 12 – which would essentially allow the province to halt the export of crude and refined products on the existing Trans Mountain pipeline.
JM: Of course, there’s only one reason for a bill like this. It’s not like Alberta is going to halt crude exports to its main customers -- US Midwest and Gulf Coast refiners. This is basically a threat to British Columbia, which relies on Alberta’s crude and refined products to satisfy local demand.
AD: It’s like saying, “You don’t want more of our dirty oil? How about none of our dirty oil?”
JM: Right. Alberta is betting that tighter gasoline supplies will drive up pump prices in British Columbia. Put the hurt on the consumers, and hopefully they will give in. And Alberta is right, in the sense that gasoline prices would rise. The Trans Mountain pipeline shipped roughly 44,000 b/d of refined fuels in December to their western neighbor, and also sends crude to BC’s sole refinery – the 55,000 b/d Parkland plant.
AD: The Parkland refinery told us they would have to turn to importing refined products if Alberta cut off supplies. That, of course, would mean Vancouver area prices would have to rise to lure in gasoline and diesel from US and Asian refiners.
JM: British Columbia could turn to Washington state refiners for supply, but there is no surplus of gasoline, diesel and jet on the West Coast. The West Coast is a bit of an island, separated from the US Gulf Coast and Midwest refining centers, and so has to rely on waterborne barrels during supply crunches.
AD: Also, there is no guarantee that Washington state refiners will continue to have access to Canadian crude if Trans Mountain halted flows from Alberta. Those refiners – like BP’s Cherry Point plant – regularly run Canadian crude off the Puget Sound pipeline, which is connected to the Trans Mountain line.
JM: Yeah, it is possible Alberta could still supply those refineries, and just bypass British Columbia. But a spokesman for Alberta’s energy ministry would only say that the proposed bill does not stipulate any location to which supply could be shut off. It was kind of like they want the threat to hang there.
AD: If they really wanted to hurt British Columbia, Alberta would halt crude supplies to those Washington state refineries. Those refiners could import waterborne crudes from say Saudi Arabia or Brazil, at a higher price of course. That higher price would likely get passed on to consumers along the Pacific coast.
JM: But halting those supplies would come at such a steep political cost as well. Alberta needs to ask how many people they really want to drag into this fight. Refiners often have to find alternative crude supplies because of emergencies – hurricanes, wars and so forth. But losing supply over a political spat between your neighbors probably wouldn't sit well with BP or Andeavor. Still, we might be getting ahead of ourselves here.
AD: True, but think about the backlash elsewhere, namely Alberta. Producers there need an outlet for their crude and have been complaining for years about the deep price discounts they have to accept as supply piles up. Where exactly will all the Canadian crude moving on Trans Mountain go if Alberta halts those flows? The 55-odd million barrels of crude storage at Hardisty and Edmonton are at their brim. Producers will be left with even lower prices. Eventually, companies will be left with no option but to reduce drilling and production and optimize maintenance schedules.
JM: Right. With WTI prices touching $65/b, the hope was brown field expansions would be approved. But that’s unlikely. This year, barring Suncor’s 194,000 b/d Fort Hills project we won’t see major new capacity being added.
AD: Producers are already stalling projects. Cenovus said Wednesday it put on hold its Foster Creek and Narrows Lake projects. Combined production was supposed to be 170,000 b/d by 2020. Cenovus cited the lack of pipeline takeaway capacity, notably the Trans Mountain expansion.
JM: Alberta’s refineries would feel some backlash as well. Alberta doesn't have many refineries, but they do send roughly 90,000 to 100,000 b/d of refined products to British Columbia. That’s around 25% of the utilization rate for Alberta refineries. The Canadian Fuels Association said they are confident Alberta is aware of the impact on local refineries.
So what are the next steps?
AD: The bill could become law in a matter of weeks. The ruling New Democratic Party has 54 representatives in the 87-member legislature, followed by the Alberta United Conservative Party at 25. Canadian Finance Minister Bill Morneau has been tasked to hold back-room talks with Kinder. Kinder has said whatever the outcome may be they will still invest in Canada where they are building crude storage tanks and also own a crude-by-rail terminal.
JM: Canada has been successful in attracting billions of dollars from the US, Europe and Asia to increase its oil sands production to 2.7 million b/d. As far as the longer term issue of takeaway capacity goes, it looks like Keystone XL has a good chance of getting built, although that’s some time down the road.
AD: In the meantime, we will have to see who blinks first in this game of chicken over the Trans Mountain expansion.
JM: Exactly. We’ll be covering it. You can find more news and analysis at Platts.com. Thanks for listening.