For Canada's largest oilsands producer, sending a recent shipment of western Canadian crude to its Montreal refinery required a detour across the Rockies, over two oceans and through one of the world's busiest waterways.
Suncor Energy Inc. went to great lengths to deliver the oil east for the test run, sending barrels by pipeline to tankers in B.C.'s coastal waters, which reached its St. Lawrence River refinery port via the Panama Canal. The roundabout journey is a testament to the scant access to eastern Canadian markets faced by companies mining and drilling up fast-growing volumes of bitumen in northern Alberta, production that's set to outstrip export pipeline capacity in a few years.
Oil companies intent on securing new customers are starting to look east, moved by stiff and unprecedented opposition that has delayed - and aims to derail - plans to lay pipe to new markets off Canada's West Coast and the U.S. Gulf Coast.
Eastern refineries are seriously eyeing the West for the first time in decades, drawn by North American oil that's selling at steep discounts to the international crudes they typically source.
Touting billions of dollars in economic opportunity that would follow market diversification, some Canadian political and business leaders envision refineries in Ontario, Quebec, the Maritimes and Newfoundland and Labrador processing western Canadian oil into gasoline, diesel, jet fuel and other products.
Canada's refineries, largely in the East import 44 per cent of their crude feedstock, according to Statistics Canada's most recent figures. Derek Burney, a former ambassador for Canada to the United States, wants to shrink that number.
"Even though we have a huge reservoir of oil of our own, we're still importing more than half a million more barrels a day of foreign oil, which are coming in at a much higher price today than the oil that's being extracted from the oilsands in Alberta," said Burney, a member of pipeline and energy company TransCanada Corp's board.
There's political appeal in the promise of increased energy security and economic spinoffs, through refining more of Canada's oil at home, a concept that has historically been deemed uneconomical by industry. Linking Alberta to Saint John, N.B., by pipeline, by reorienting and repurposing old lines and laying new pipe, would shift the long-standing north-south flow of oil to the East, proponents say.
It's a dream full of challenges, including a costly redrawing of Canada's energy infrastructure and significant refinery upgrades to handle the oilsands crude that's increasingly tilting Western Canada's production profile heavier. Uncertainties include the future price of Canadian oil, which could rise substantially with an Atlantic link, and the sway of environmental critics who are lining up against efforts to send oilsands bitumen east.
The concept publicly re-emerged last November, when the U.S. State Department delayed a decision on the proposed Alberta-to-Texas Key-stone XL oil pipeline, a project that proponent TransCanada has now split up. Enbridge Inc.'s proposed Northern Gateway line to the West Coast faces a similar regulatory delay and ardent opposition from First Nations and environmental groups.
"The decision on Keystone (XL) was a wake-up call," Burney said. "Canadians, industry, all of us should be thinking of alternative options."
Eastern Canada's refineries can process 1.2 million barrels per day of oil. If linked to western oil, refiners could make use of spare capacity and even grow the industry, Burney says. He conceives of a new pipeline from Montreal to Saint John, where the existing Irving Oil Ltd. refinery could process western oil and a deepwater ocean port could receive supertankers destined for Asia.
A reversal of flow on an existing line from Sarnia, Ont., to Montreal and reversal of the Portland, Maine, line to Montreal would also get barrels water-borne.
Andrew Leach, a University of Alberta business professor focused on energy and the environment, said TransCanada's Alberta-to-Quebec Mainline natural gas pipeline, suffering from declining gas throughput, could be repurposed to transport oil. Burney suggests building a new line along its right-of-way.
TransCanada spokesman James Millar said it's much cheaper to build refining capacity in Eastern Canada, which can access a larger market in Canada, the U.S. East Coast, Europe and even India and China, but the refinery sector can't develop until a pipeline is in place from the West.
"America remains an important market for Canadian crude, but in light of opposition to the Keystone XL pipeline south of the border, it is in Canada's national interest to explore other markets, including the domestic market," Millar said in an e-mail.
This week in Ottawa, Wildrose Alliance Leader Danielle Smith called for an "all-Canadian solution" to carving out new oilsands markets, including an oil pipeline to Saint John.
In the same vein as new markets in the U.S. Gulf Coast and off B.C., oilsands producers are considering the eastern opportunity.
"Access to market in one way is going south, to the biggest consumer, but to me it's also going west or east, as long as it goes somewhere else in addition," Lars Christian Bacher, president of Statoil Canada, said at a recent oilsands conference in Calgary.
The Canadian Association of Petroleum Producers expects bitumen production to increase by 45 per cent from 2010 to 2.2 million barrels per day by 2015, about the same time analysts predict already tight export pipeline capacity will be full.
Growing supplies of light oil in Saskatchewan, Manitoba and the U.S. Midwest make access to eastern re-fineries largely set up to process light, sweet oil even more attractive.
Lack of market diversification is discounting Canadian crude prices, eating into corporate profits and forcing governments to leave royalty and tax dollars on the table.
Oilpatch producers are being paid more than $30 less per barrel of Western Canada Select oil than U.S. crudes, over the last week-and-a-half, or about 60 per cent the going rate of international Brent-indexed oil, partly on refinery downtime south of the border.
West Texas Intermediate bench-mark crude is itself so abundant, because of volumes constrained by pipeline capacity in the U.S. Midwest, that its wide discount to Brent of more than a year reached just over $27 last October.
Those differentials have eastern refining executives talking to potential Calgary-based suppliers.
Multiple sources close to family-owned Irving Oil say the company has brought crude into Saint John by rail in the past couple of months to test in its 300,000 barrel-per-day refinery, Canada's largest.
Senior Irving Oil executives are in Calgary lately, trying to contract firm supply, sources say. The company declined to comment.
Suncor has said it supports a reversal of Enbridge's Line 9 pipeline from Sarnia to Montreal, so its 137,000 barrel-per-day Montreal refinery can process western Canadian oil.
"We believe that would help secure the Montreal refinery's long-term flexibility, its performance and its viability," said John Quinn, general manager responsible for integration and planning, refining and marketing. Speaking last month to the House of Commons committee on natural resources, Quinn suggested the firm could take on refinery upgrades to adapt to the crude supply.
Enbridge has applied with the National Energy Board to partially re-verse flow on the 240,000 barrel-per-day Line 9 so it goes east to Westover, Ont., and is gauging support for a full reversal to Montreal.
Vern Yu, Enbridge vice-president of business development, said talks should continue for another three to four months before a potential application to the regulator. If successful, the full reversal would put refineries in Quebec and New Brunswick, which he said are supportive, on the same footing as some U.S. refineries with cheaper feedstock in the Midwest.
"We're very close to making that happen," Yu said, putting the cost per barrel to ship western crude to Montreal at about $6 to $7. Oil could move by barge along the St. Lawrence River and on to Saint John, he said.
Driving the eastern push is the toughest business operating climate eastern refiners have experienced in decades.
Between 2005 and 2008, it was a "golden era" for the North American refining industry, said Steve Fekete, Calgary-based managing consultant of IHS Purvin & Gertz. Refineries were running nearly full tilt to keep up with high demand and profit margins were "blown out," Fekete said.
Then the recession hit. Demand for gasoline and other refined products plummeted as consumers tightened spending, part of a forecast longer-term decline that caused Irving Oil and BP PLC to set aside plans for a second Saint John refinery in 2009.
Synthetic crude oil derived from oilsands bitumen makes up 25 per cent of Ontario refinery feedstock, but refineries in Atlantic Canada and Quebec are almost entirely reliant on imported crudes, according to Natural Resources Canada.
In the past two years, rail companies seeing an opportunity to trans-port cheaper feedstock to coastal refineries have built loading facilities in prolific oilfields to link to their existing rail networks.
Rail is pricier, some $6 to $8 per barrel from northern Alberta to Canada's West Coast versus the roughly $3 per barrel the proposed Northern Gateway pipeline would cost, but it can get to more destinations sooner than new pipe and capture the oil price differentials.
While rail carriers have publicly boasted about deliveries of crude to the U.S. Gulf Coast, underserved by pipelines, they've also quietly been sending test shipments east.
Harold York, vice-president of downstream consulting at Wood Mackenzie, said unit trains with 80,000-barrel batches have been moving crude since last summer from North Dakota to refineries in New Jersey and Pennsylvania.
"The differential between WTI and Brent is so large that even after accounting for the more expensive transportation, it's still an attractive barrel to make it to the East Coast," York said.
The big questions are whether oil price differentials will remain high long enough to justify an overhaul of pipeline infrastructure in Canada and whether new lines would eliminate the price discounts.
Line reversals and multibillion-dollar new construction require 10-to 20-year shipping commitments from refining firms, which would have to be confident lower North American oil prices are here to stay. And if eastern refiners pay less than world prices for oilsands crude to justify transportation, oilsands producers are earning less per barrel, Leach noted.
Some analysts predict the price gap will close as soon as pipelines start serving the Gulf Coast from Cushing, Okla., and give western Canadian crudes stuck at the storage hub prices closer to international crudes, over the next couple years.
"Banking on that spread being there for long enough to get a pipeline built to service Eastern Canada is pretty optimistic," Leach said.
With refinery closures on the U.S. East Coast and pipelines proposed to Texas refining centres, an opportunity to move oilsands barrels east to Portland, Maine, along with ocean transport onto to the Gulf Coast, is gone, said Yu.
A previous project called Trail-breaker would have fully reversed Line 9, as well as the Portland-to-Montreal line run by Montreal Pipe Line Ltd., but was scrapped during the recession.
"That project is effectively dead and buried at this point," Yu said.
Read more: http://www.calgaryherald.com/business/Canadian+producers+look+east/6281973/story.html#ixzz1olunqEzh