If left unaddressed, pipeline shortfalls will put Canada's oil industry at risk and will have "substantial negative impact" on the country's economy, according to a report issued by the Canada West Foundation (CWF).
"Growing output from the oilsands and the transformative effects of hydraulic fracturing of hydrocarbon-rich shale deposits are ushering in an era of abundant oil supply on the interior of the continent. Meanwhile, coastal regions that have been historically reliant on overseas imports are facing high feedstock prices and restricted access to crude oil supplies," according to the "Pipe or Perish" report, which was written by CWF senior economist Michael Holden and funded by the Government of Saskatchewan. "On top of all that, demand for oil products in North America is falling.
"The continent's oil transportation infrastructure is rapidly becoming ill-suited to this new environment. In essence, some pipes go to where they are needed less, others are inadequate to take away oil from new producing centers, and there is insufficient capacity to deliver product to where demand is the greatest and growing, including overseas markets."
Western Canada needs to develop transportation capacity to reach Asia, the U.S. Gulf Coast, Eastern Canada and the U.S. eastern seaboard, according to the report. Building new pipelines is the best long-term transportation solution, Holden said, and current market conditions don't support developing additional refining and upgrading capacity in western Canada.
There are proposals on the table to add as much as 3.4 million b/d to Western Canada's export pipeline network -- "more than enough to address looming capacity constraints and to accommodate expanded production" -- but getting the projects built before pipeline capacity limits future growth is a challenge. Most of these proposals are in the early developmental stages and subject to changes in design and capacity, according to the report.
One of the largest of the proposed export pipelines is TransCanada Corp.'s C$7 billion, 1,700-mile Keystone XL project, which is seeking a presidential permit from the U.S. State Department (see Shale Daily, Jan. 23; Dec. 10, 2012a; Jan. 19, 2012).
On Tuesday TransCanada CEO Russ Girling said the Calgary operator is continuing to expand its "natural gas footprint" in Alberta, the United States and in Mexico, but in the near-term, TransCanada is putting a lot of its chips into oil pipeline expansions. TransCanada's Canadian Mainline system continues to be a "critical piece of infrastructure" for natural gas, but a top priority is to convert to crude the Alberta-to-Quebec section. That project has been in the works for close to a year. The National Energy Board is expected to issue a decision on whether to approve the project in late March or early April, Girling said.
While the management team waits on NEB's decision, an open season for oil shippers is being readied, said pipeline chief Alex Pourbaix. Depending on the level of support, TransCanada plans to convert the pipe to carry about 1 million b/d of crude oil. As designed, the converted pipe would carry light oil from Alberta and Saskatchewan, as well as synthetic crude from oilsands upgraders. Construction could begin in 2015, with operations ramping up by 2017.
"We know there are 400,000 b/d of demand in the domestic market of Quebec and a further 400,000 b/d in the Maritimes, largely at Irving's [Oil Ltd.] refinery in Saint John," Pourbaix said.
Canada's eastern markets would be the initial target, but the U.S. eastern seaboard also could be on the drawing board eventually.
Girling noted that the United States "is importing 1.5 million b/d, and that suggests a market for domestic production to attach to that market." A pipeline traversing Maine to shorten the route to the Maritimes system isn't being considered, said Pourbaix. The NEB approval process offers certainty to project builders, he noted.
Final approval of the stalled Keystone XL by U.S. officials appears to be only a few months away, he told analysts. TransCanada's supplemental environmental impact statement (SEIS), which includes Nebraska's recent re-route OK, should be approved as soon as one or two weeks.
"At that point, we are of the view that the U.S. State Department will have every piece of information it could require to make a decision," Pourbaix said. When the required statutory notice periods are included and the SEIS is approved, U.S. officials should be able to issue a final decision "within two to three months."
Other planned pipeline projects in western Canada include Kinder Morgan's TransMountain Expansion, which would carry 590,000 b/d of crude oil and refined products from Edmonton to Vancouver; the Alberta Clipper Expansion, which would move 120,000 b/d of heavy crude from Hardisty to the U.S. Midwest; and two Enbridge projects based in Edmonton -- Northern Gateway, which would move 530,000 b/d of diluted bitumen and synthetic crude to Kitimat, and the Line 9 Reversal, which would carry 300,000 b/d of light and heavy crude to Montreal.
Enbridge recently outlined a C$6.2 billion, four-year effort to expand several of its pipelines to access light oil markets in the eastern United States and Canada as part of a continuing effort to stretch Bakken and western Canadian oil supplies into new markets (see Shale Daily, Dec. 10, 2012b).
The 1,717-mile Express-Platte Pipeline System, one of the three major systems that move western Canadian crude oil to refineries in the Rockies and Midwest, was sold in December to Houston-based Spectra Energy Corp. for $1.49 billion (see Shale Daily, Dec. 12, 2012).
On the U.S. side of the border, the railroad transportation of Bakken oil supplies continues to grow, and transporters are investing in new facilities on a pace with pipeline takeaway growth, according to the the North Dakota Department of Mineral Resources and the state pipeline authority (see Shale Daily, Nov. 2, 2012).
But, while rail can fill some of the transportation gap until more pipeline capacity comes online, only major pipeline projects can economically move enough western Canadian oil, according to the CWF report.
"The consequences of inaction are considerable. Already, the deeply discounted price for Canadian oil is resulting in billions of dollars lost to the Canadian economy. The longer-term consequence if this situation endures is under-investment, stranded assets, reduced government revenue and market opportunities foregone to others. Delaying even a single pipeline project that improves market access can cost up to C$70 million per day in foregone economic activity," Holden said.