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Enbridge Pipe Reversal to Deliver U.S. Shale Oil to Canadian Refineries

After capturing a healthy and growing share of Canadian natural gas consumption with shale production from the United States, exploration and production companies are poised to repeat the feat in oil markets.

Quebec refineries aim to tap U.S. shale sources -- from the Bakken in Montana and North Dakota to the Eagle Ford in Texas -- to help fill delivery capacity they have booked on a 300,000 b/d eastern Canadian pipeline project.

The import plans surfaced in evidence presented last week to the National Energy Board (NEB) in support of an application by Enbridge Inc. to reverse and increase flows on an Ontario and Quebec leg of its oil turnpike known as Line 9. The refineries stand to save C$23 billion over the project's 30-year life span by using U.S. and Western Canadian oil to replace costlier imports from the Middle East, West Africa and the North Sea, said Enbridge.

The size of the prize emerged from a market forecast by IHS Global Canada Ltd., in a report endorsed by refiners Valero Energy Inc. and Suncor Energy as a "reasonable representation" of their market conditions and expectations.

Although the Line 9 plan has ignited international protest from eco-critics as a potential route for "dirty-oil" bitumen from the northern Alberta tar sands, the refiners' priority item is light crude free of impurities.

The pipeline project's customers -- a 265,000 b/d Valero operation near Quebec City, a 135,000 b/d Suncor site in Montreal, and Imperial Oil's Nanticoke plant in eastern Ontario -- are not set up to use low-grade heavy oil or bitumen steeped in sulfur, IHS said.

"Increasing supplies of light sweet [sulfur-free] crude from shale reservoirs such as the Bakken or Eagle Ford offer refineries with capabilities to process conventional light crudes a significant source that was not previously foreseen. These crudes are generally directly substitutable for imported conventional light crudes," said IHS.

Valero, Suncor and Imperial requested all the proposed Line 9 delivery service in an "open-season" auction of capacity. Enbridge set aside 25,000 b/d or 8% for short or spot, first-come first-served bookings as standard Canadian pipeline practice.

Valero gave producers an early taste of its determination to shop around for supplies this spring by having its Quebec City plant buy its first sample of Eagle Ford Shale oil, delivered north by tanker from a Gulf of Mexico port.

Suncor told the NEB that having the greatest possible array of supply alternatives is essential because the East is the most competitive refining region in Canada. "By virtue of its access to the St. Lawrence Seaway this market is, in effect, a 'tidewater' location. Competition is fierce and includes not only refineries in Quebec, but also refineries across the U.S. eastern seaboard, the Gulf of Mexico and Europe. Finished products such as gasoline and diesel can be imported into Quebec from all these locations by land and by water."

Valero added, "While the refining industry faces substantial competition, it requires that expensive improvements continue to be made as a direct result of the changing business environment. Evolving environmental regulation has led to tougher emissions standards, requiring that refineries make continuous emissions reductions as part of their processing capabilities. These improvements are extremely cost-intensive, making it increasingly important that savings be recovered in other areas including available sources of feedstock."

Valero reports that about C$1.5 billion has been spent on improvements to the Quebec City plant since 2001. More than $750 million has been poured into the Suncor Montreal operation over the past nine years.

IHS forecasts that the Montreal plant would save C$7.34-9.42/bbl on its raw materials when the Line 9 project is completed in 2015. The switch to U.S. and western Canadian oil is expected to still be worth C$4.44-6.41 in 2025. Anticipated savings at Quebec City are lower due to higher costs of deliveries to its site 250 kilometers (156 miles) east of Montreal, but still substantial at C$4.80-6.89/bbl in 2015 and C$1.79-3.79/bbl in 2025.

Although eastern refineries are increasingly taking deliveries by rail from western Canadian and U.S. shale oil sources to replace overseas supplies, IHS observes that pipelines remain more economical than trains. Tolls for a trip on the entire Enbridge route from the Alberta capital of Edmonton to the farthest east end of the reversed Line 9 will be C$5.22/bbl for light oil and C$6.31 for heavy grades or bitumen, while a comparable trip by railway tank car across the U.S. or Canada costs C$13-$16/bbl, IHS said.

Among Canadian industry analysts, the Line 9 project is seen as an early and low-cost illustration of large-scale change on the horizon for the North American oil market. The anticipated trend mimics developments in the natural gas trade since 2007, where U.S. shale supplies have enabled American exporters to more than double northbound sales into eastern Canada into an unprecedented range of 1 Tcf per year.

Enbridge predicts the Line 9 project would be completed swiftly for only C$129 million after the regulatory process finishes dealing with safety and environmental protests that have become routine for all pipelines. A version of this plan has been successfully done before.

The Line 9 project is a re-reversal. Built in 1976, the 830-kilometer (520-mile) Ontario-Quebec leg of the Enbridge network delivered Canadian oil from west to east for 23 years. The flow was reversed in 1999 to cater to inland refiner demand for imports from the Middle East and North Sea, when overseas oil was the lowest cost item on the global market.

TransCanada Corp. highlighted the strength of belief that North American production would take over as the global oil growth leader last week, by announcing customers stepped forward in an open-season capacity auction for a C$12 billion conversion and extension of part of its natural gas Mainline into a 1.1 million b/d oil conduit from Alberta all the way to a terminal on Canada's east coast at Saint John, New Brunswick.

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