Building a stronger Canadian export-oriented economy
Enbridge Inc.’s president of liquids pipelines, Steve Wuori views the Northern Gateway pipeline project as a nation building exercise. The Calgary-based company has been working on the proposed 1,177-kilometre pipeline for more than a decade and filed for regulatory approval with the National Energy Board (NEB) last year. While environmentalists debate its merits and regulators review the proposal, oil producers in Canada and oil processors around the world eagerly await a decision.
Currently, more than two-thirds of Canadian oil production heads to the United States. Growing oil production south of the border has forced producers and refiners here to take a discount for their product and emphasized that the success of Canada’s oil and gas industry hinges on the ability to diversify its markets. Whether it’s to the west coast or other points throughout North America, producers and refiners need pipelines to get it there.
Wuori oversees a liquids pipeline network of 24,738 kilometres that spans most of North America and transports about 2.2 million barrels per day of crude oil and liquids. Liquids Pipelines, the largest of Enbridge’s four business units, has been the company’s most significant contributor to increased annual average adjusted earnings per share (EPS) of 10 per cent per year over the past decade. “It’s been very robust growth and a number of key developments have taken place,” says Wuori. “Really we’re focused on the south, the west and the east.”
First, however, Enbridge had to make peace with its customers. Until 1995, tolls on Enbridge’s pipelines were developed on a cost of service basis. “We would appear annually in front of the National Energy Board and do mortal combat with shippers,” recalls Wuori. “Them saying our costs were too high; we were saying our costs were too low.”
So Enbridge and other pipeline companies decided it would be better to work directly with the shippers on an agreement, eliminating the role of the regulators. “We finally came to this 10-year deal that’s the king of them all and pulls together all of the learning’s from the first 15 years,” says Wuori.
The new 10-year competitive toll settlement, essentially creating a capped toll system, was put in place in July 2011. “It’s extremely important to our customers to have certainty to how the tolls apply on our system and the knowledge that the tolls will not spiral upwards,” says Wuori. “That means a lot as companies plan for expansion or want to access new markets.”
Working closely with producers has become an integral philosophy at Enbridge; ensuring the company’s plans for building pipeline capacity match industry expectations. Providing refineries in eastern Canada with access to growing light oil production from western Canada and the Bakkan formation region is one of those expectations. In late May, Enbridge attended NEB hearings in London, Ontario, for the reversal of the direction of a section of its Line 9A in Ontario to flow east from Sarnia to Westover. By late 2014, it’s anticipated that the pipeline will carry oil from Alberta, Saskatchewan, Manitoba and North Dakota as far east as Montreal, once the second section of the pipe, Line 9B, has also been reversed. Enbridge plans to file an application with the NEB for this second section later this year.
Wuori notes that currently 52 per cent of oil used in Canada is imported. Most of it arrives by tankers from Europe and West Africa to various points along the St. Lawrence Seaway. “All of the refineries in the east are in Atlantic basin pricing, they’re paying Brent crude pricing, which is some $20 per barrel higher than crudes that are available from the west,” he says. “In the eastern US and in eastern Canada, refining margins are quite a bit tighter. Line 9, when reversed, should give them access to a more attractively priced feedstock.”
There are two major benchmark prices for Canadian crude. Western Canada Select (WCS) is the price attached to heavy crude, while Edmonton Par is the price attached to light crude. The price for both oils – adjusted for quality and transportation costs – typically trades at a similar price to West Texas Intermediate (WTI), which is the benchmark price of oil futures contracts traded on the New York Stock Exchange. However, increasing production of heavy oil and light oil has been converging in the US Midwest and has created a bottleneck in Cushing, Oklahoma. This oversupply has pushed prices of WTI downward and Canadian oil has taken an even bigger plunge.
While light oil producers in western Canada have a new outlet in the east, heavy oil producers operating in Alberta’s oil sands are waiting for more outlets to the south. As producers wait for pipelines to provide greater access to the Gulf Coast and newly reconfigured US refining, railways have been quick to offer a passage for transporting oil away from the US Midwest. Enbridge is even building an 80,000 barrels per day rail terminal in North Dakota. “I don’t think that rail is, again over a long distance over a long period of time, an optimal solution compared to pipelines,” Wuori adds. “But in the absence of a pipeline or in advance of a pipeline, it’s a great solution.”
Pipeline access to the Gulf Coast is the industry’s best solution, says Wuori. To this end, Calgary-based TransCanada Corp. is working towards building the 1,187-kilometre Keystone XL pipeline from Alberta to Texas, and Enbridge has signed a joint venture with US-based Enterprise Products Partners to reverse direction of the Seaway Pipeline. Crude began flowing south from Cushing in May and Enbridge plans on expanding the Seaway system to provide capacity totalling 850,000 barrels per day by mid-2014.
“Providing an outlook from Cushing to a better priced market, from a producer’s perspective, is certainly positive in terms of direction,” says Wuori.
Then there’s the Northern Gateway pipeline. The CA$5.5 billion project would stretch from Bruderheim, Alberta to Kitimat, British Columbia. It would have the ability to bring 525,000 barrels per day of oil sands derived crude to the west coast where ocean travelling tankers could ship the product to global markets. The theory is that if Canadian oil production isn’t confined to North America the price will rise and Wuori believes there’s opportunity for export to China, Japan, South Korea and Thailand. “The Pacific Rim pricing is clearly attractive to Canadian producers and the country generally,” Wuori notes.
But opposition to the project has been public. Five years ago, Enbridge began consultations with stakeholders within 80 kilometres of the right-of-way for the 36-inch diameter pipeline. “You could argue that’s a wider swath than necessary,” says Wuori. “We’ve known there would be a lot of considerations and concerns, in northern BC especially, and we did that [the consultations] on our own.”
Consultations are now a matter of daily operations for Enbridge. Wuori says the key to building any large-scale infrastructure project is clearly articulating the plans and objectives, while demonstrating the economic need for the project and implementing risk management principles. “ We continue to work through what we think is a very thorough regulatory process ― public consultation and First Nations consultation ― not only through the government initiative, but through our own consultation that we’ve done for years,” Wuori explains.
Enbridge is optimistic the pipeline will get approved and is patiently awaiting formal hearings later this year, with a potential decision in 2013. “The First Nations are fond of saying we think ahead by seven generations and I think that really does give you the picture of longer-term thinking,” says Wuori. “We view Northern Gateway as an example of very long-term thinking, like the Trans-Continental railway. It was a project that was objected to and in some cases very strongly, but it was done and look what it’s done for the country over a long, long time.”