Moving Parts by Peter McKenzie-Brown

Keystone XL may be the flashpoint for pipeline protests, but a complex web of projects is needed to ensure western Canadian producers access to global markets

This article appears in the May issue of Oilweek

Since Samuel van Syckle constructed his legendary oil pipeline in 1863, the pipeline industry has reflected the economics, geography and the state of technological development. In some cases, it also led to social tension. In van Syckle’s case, the 8-kilometre line in Pennsylvania delivered oil to a railway loading station for $1 per barrel, compared to the $3 per barrel cost of having local teamsters do it.
Teamsters believed the line was unfair competition and vandalized the pipe. The sheriff posted guards to protect it, and pipelines began to grow in length, sophistication and number.

Today’s trunklines crisscross the continent, with the most northerly line stretching south from Norman Wells and Alaska’s Prudhoe Bay. From van Syckle’s time to the present, virtually all of North America’s crude oil pipelines have been constructed within the Great Interior Basin – once an inland sea, today a vast bed of sedimentation that stretches from the Gulf of Mexico to the Beaufort Sea.

“There are many moving parts that go into the way the pipeline system works in North America,” says Robin Bertram of Deloitte’s energy consulting group. A professional engineer with a quarter century’s experience in reservoir exploitation, field development, reserve determination and economic evaluations, he notes that the Enbridge system “has a lot of different components which reflect different qualities of oil. There are some for light oil, some for heavier oil and some for bitumen. There are some that can handle the full spectrum of products. When you start adding up all those volumes it’s easy to say there is a certain takeaway capacity from Alberta or between one point and another, but the supply of crudes may not be in harmony with the capacity available. As Alberta’s crude oil becomes heavier and heavier, we will continue to see the problem of not being able to move much of that product to market.”

The transportation companies need to optimize what those different lines can carry in terms of the product types available, according to Bertram. “Part of the solution lies in moving different grades of oil through the same line,” he argues. “Also, there has been a lot of talk about converting some of the natural gas pipelines so they can transport crude oils. All you’d have to do is change out some of the surface pumping equipment – take out the high-pressure turbines and replace them with pumps more suitable for pumping fluids.”

Converting under-used gas pipelines would enable the industry to transport more fluids across the continent, and it wouldn’t be difficult technically. In terms of actual pipe wall thickness, natural gas pipelines have to be able to hold pressure of around 1000 pounds per square inch. “That’s the normal operating pressure from Empress to Ontario,” says Bertram. “I would be really surprised if bitumen pipelines required a greater wall thickness.”

One of Bertram’s colleague’s is Ben Kosman. A manager in Deloitte’s corporate finance practice, Kosman holds an MBA from INSEAD, a leading business school in France. He agrees that conversions of this type are technically feasible but worries about the expense.

“This can be very costly. Such a conversion would be in the multi-billion dollar range.” He repeatedly stresses that the solution to the continent’s pipeline dilemma does not lie in implementing a bunch of mega-projects.

Bertram agrees. The disputed Northern Gateway pipeline, which would ship oil from the West Coast to mostly Asian markets “makes sense from my point of view, since it allows a certain volume of heavier grades to leave the continent. The TransMountain project is also on the books to be expanded, and that will also help relieve the pressure. It is an important part of the solution. There are many small steps that the industry needs to take. There’s the potential for line reversals in Ontario. There’s the prospect of converting some gas pipelines from Empress out to Ontario. Then there’s Keystone XL. All of those things are going to help, but there is no one thing that is going to give us the answer. You can’t think ‘Okay, we signed off on this one thing so we can forget about the others.’ All these projects have to proceed in order to stabilize the North American oil price.”

Gushing to Cushing
Both men are concerned about the economic fundamentals that have been driving down oil prices for years. New geological and technological developments are making greater oil supplies available in North America’s interior and producers without access to overseas markets – especially oilsands producers, who have low-quality oil to sell – are consequently getting low prices for their oil. At time of writing, West Texas Intermediate sells for $20 less than Brent Light, which fetches $112 per barrel on world markets.

Bitumen prices may be ghastly, but there’s a bright side. In its March price posting, Cenovus put the price of Cold Lake blend at $51 per barrel.

“So what?” asks Laricina Energy’s advisory director, Neil Edmunds. “They produce the stuff at less than $20 per barrel. There’s still a good return in that.”

The oil sands do not have “the highest lifting costs on the planet” – a view put forward by such popular economists as Jeff Rubin. “Cenovus’s cash costs are under $20 a barrel. Is that a high lift? A lot of enhanced oil recovery will cost more than that. There aren’t a lot of offshore operators doing less than $20 a barrel.”

Now he warms to his topic. “Oilsands has never been a high lifting-cost business because it just wouldn’t be profitable if it were. If you aren’t making a big positive cash flow, you aren’t going to payout your huge capital costs. With a steam-oil ratio of two, you have to boil two barrels of water to recover one barrel of oil. You can recover one barrel of oil with one gigajoule of gas which costs $2.50, and that’s your number one operating cost. The price could go down to $40 and Cenovus would still be doing very well, thank you very much.”

Cash flows notwithstanding, oil price differentials reflect the reality that North America’s pipelines are not in sync with their sources of supply. Originally designed to move lighter oils and refined products from the Gulf Coast to inland customers, liquids pipelines in the US are now running the wrong way. Today very few refineries in America’s mid-West can refine bitumen – only Denver, Colorado and Wood River, Illinois, come immediately to mind.

The industry needs pipelines to transport product from the oil sands to the Gulf. Canadian bitumen has a fair amount of pipeline access to Cushing, Oklahoma, which is America’s traditional oil hub. But there isn’t a lot of pipeline capacity to move it down to the Gulf Coast, where the vast refining complexes represent a 7 million barrel-per-day market for the stuff. Not incidentally, access to the Gulf could also provide tidewater access to overseas buyers.

Bitumen sits in tanks at Cushing, which doesn’t have the pipeline capacity to move it all south. On the positive side, the recent reversal of the Enbridge-operated Seaway pipeline from Cushing to the Gulf is helping. Seaway used to move refined products north from the Gulf Coast. Assuming a mix of light and heavy oils, today it can ship about 400,000 barrels per day of Northern oil south from Cushing. Supplies of Canadian oil are still on the rise, though. This is another partial solution.

After it has been approved and constructed, the Keystone XL mega-project will solve much of the problem of moving oil from Cushing to the Gulf, but it will still be only a partial solution to the industry’s woes. According to Kosman, “in some ways, development of Keystone has already begun. TransCanada has begun to find ways to ship pipeline from Cushing down to the Gulf Coast, for example. There are a number of smaller initiatives trying to remove the glut at Cushing by moving product down to the Gulf coast.”

He returns to his basic message: “The solution is not going to lie in a single mega-project.”

Bertram observes that TransCanada has another asset – unused gas pipeline capacity – “that is now underutilized, and they need to look at the best way to deploy that asset, if they think it makes economic sense to do so.” In other words, convert some of the gas lines so they can ship bitumen blends to Sarnia or other parts east.

Kosman agrees, and notes that line reversals in Ontario could be another part of the puzzle. “For example, Line 9, which takes imported oil from Montréal to Sarnia, could be reversed. You could sell Alberta oil to refineries that are now importing expensive heavier oil from Venezuela.”

An Enbridge proposal to reverse a section of Line 9 – a segment between Sarnia and Westover, Ontario – is already awaiting regulatory approval. Initially, the reversal will transport only 50,000 barrels per day of western Canadian oil to Imperial Oil’s Nanticoke refinery, near Hamilton. Eventually, though, the line is likely to transport western Canadian oil to Montreal – a total reversal from the project’s original design. Built in the mid-1970s, the line has the capacity to move up to 245,000 barrels per day of imported offshore oil from Montreal. Because it would ship bitumen and other grades from Western Canada to Montreal, daily volumes would drop by as much as one-fifth.

Another possibility would be to reverse the pipeline which carries oil from Portland, Maine to refineries in Montréal. That idea is under discussion, but boards of selectmen (New England’s equivalent of town councils) along the route are debating a proposal put forward by the Healthy Waters Coalition, an environmental group. The coalition worries that an oilsands spill into could cause a great deal of environmental damage. “There could be some problems with that pipeline,” Kosman deadpans.

Irrepressible Alward While Kosman and Bertram believe in incremental steps, the irrepressible premier of New Brunswick has a big, bold vision. David Alward proposed converting an unneeded TCPL natural gas pipeline for bitumen transport, then constructing a line through Quebec to Canada’s biggest refinery and eastern Canada’s largest deep-water port at St. John.

“Our government believes a national oil pipeline – bringing Western Canadian crude to St. John – is strategic to Canada’s national interests,” he said in a January speech. “It would open up new markets for one of Canada’s most important exports; help Canada get full and fair world market prices for its energy; and create new jobs and new opportunities right here in New Brunswick.”

Warming to his subject, he said “I envision a West-East pipeline that can make New Brunswick Canada’s next energy power house. Because of Saint John’s deep-water port and Irving Oil’s world-class refining experience and capacity, New Brunswick can play a central role in connecting Canadian resources with growing world markets. That could mean thousands of jobs for our trades-people and billions of dollars of investment.”

Both Kosman and Bertram approve. “The concept certainly seems to make sense,” says Kosman, before adding some notes of caution. “But will TransCanada be receiving appropriate toll rates for the project? Being able to export oil from the East Coast could certainly make the project attractive. You’d have to know what the project’s capital cost would be, how much TransCanada would have to charge shippers and so on….”

Bertram is less reserved. “This is a project that would in many ways bring people in the country together. It would allow Eastern Canada to be less dependent on foreign oil. We always like to say that Canada is energy self-sufficient, but we ship a lot of product south of the border and we import a lot in the East. In true numbers, yes, we are self-sufficient. If you’re going to look at the actual products we’re consuming across the country, perhaps we’re self-sufficient, but we still have to bring in oil from Venezuela to Eastern Canada. Also, it would provide economic activity in one of the less affluent provinces. Having transportation systems that allow other jurisdictions to be buying Western Canadian crude oil to me makes an awful lot of sense.”

Many environmental groups have warned about the environmental dangers of building pipelines. However, Robin Bertram takes the opposite point of view: The risk of environmental problems will diminish once the pipeline system has been rejigged.

“Crude oil is being railed across the continent in larger and larger volumes,” he observes. “The pricing differentials are just so large that even when you transport relatively small quantities by rail, you can get a much better return on that product. So economically it makes a lot of sense. You’re now getting maybe hundreds of thousands of barrels being railed across the continent. From an environmental perspective, I’d much rather have it moving by pipeline.”

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	Keystone XL may be the flashpoint for pipeline protests, but a complex web of projects is needed to ensure western Canadian producers access to global markets This article appears in the May issue of Oilweek Since Samuel van Syckle constructed his legendary oil pipeline in 1863, the pipeline industry has reflected the economics, geography and the state of technological development. In some cases, it also led to social tension. In van Syckle’s case, the 8-kilometre line in Pennsylvania delivered oil to a railway loading station for $1 per barrel, compared to the $3 per barrel cost of having local teamsters do it. Teamsters believed the line was unfair competition and vandalized the pipe. The sheriff posted guards to protect it, and pipelines began to grow in length, sophistication and number. Today’s trunklines crisscross the continent, with the most northerly line stretching south from Norman Wells and Alaska’s Prudhoe Bay. From van Syckle’s time to the present, virtually all of North America’s crude oil pipelines have been constructed within the Great Interior Basin – once an inland sea, today a vast bed of sedimentation that stretches from the Gulf of Mexico to the Beaufort Sea. “There are many moving parts that go into the way the pipeline system works in North America,” says Robin Bertram of Deloitte’s energy consulting group. A professional engineer with a quarter century’s experience in reservoir exploitation, field development, reserve determination and economic evaluations, he notes that the Enbridge system “has a lot of different components which reflect different qualities of oil. There are some for light oil, some for heavier oil and some for bitumen. There are some that can handle the full spectrum of products. When you start adding up all those volumes it’s easy to say there is a certain takeaway capacity from Alberta or between one point and another, but the supply of crudes may not be in harmony with the capacity available. As Alberta’s crude oil becomes heavier and heavier, we will continue to see the problem of not being able to move much of that product to market.” The transportation companies need to optimize what those different lines can carry in terms of the product types available, according to Bertram. “Part of the solution lies in moving different grades of oil through the same line,” he argues. “Also, there has been a lot of talk about converting some of the natural gas pipelines so they can transport crude oils. All you’d have to do is change out some of the surface pumping equipment – take out the high-pressure turbines and replace them with pumps more suitable for pumping fluids.” Converting under-used gas pipelines would enable the industry to transport more fluids across the continent, and it wouldn’t be difficult technically. In terms of actual pipe wall thickness, natural gas pipelines have to be able to hold pressure of around 1000 pounds per square inch. “That’s the normal operating pressure from Empress to Ontario,” says Bertram. “I would be really surprised if bitumen pipelines required a greater wall thickness.” One of Bertram’s colleague’s is Ben Kosman. A manager in Deloitte’s corporate finance practice, Kosman holds an MBA from INSEAD, a leading business school in France. He agrees that conversions of this type are technically feasible but worries about the expense. “This can be very costly. Such a conversion would be in the multi-billion dollar range.” He repeatedly stresses that the solution to the continent’s pipeline dilemma does not lie in implementing a bunch of mega-projects. Bertram agrees. The disputed Northern Gateway pipeline, which would ship oil from the West Coast to mostly Asian markets “makes sense from my point of view, since it allows a certain volume of heavier grades to leave the continent. The TransMountain project is also on the books to be expanded, and that will also help relieve the pressure. It is an important part of the solution. There are many small steps that the industry needs to take. There’s the potential for line reversals in Ontario. There’s the prospect of converting some gas pipelines from Empress out to Ontario. Then there’s Keystone XL. All of those things are going to help, but there is no one thing that is going to give us the answer. You can’t think ‘Okay, we signed off on this one thing so we can forget about the others.’ All these projects have to proceed in order to stabilize the North American oil price.” Gushing to Cushing Both men are concerned about the economic fundamentals that have been driving down oil prices for years. New geological and technological developments are making greater oil supplies available in North America’s interior and producers without access to overseas markets – especially oilsands producers, who have low-quality oil to sell – are consequently getting low prices for their oil. At time of writing, West Texas Intermediate sells for $20 less than Brent Light, which fetches $112 per barrel on world markets. Bitumen prices may be ghastly, but there’s a bright side. In its March price posting, Cenovus put the price of Cold Lake blend at $51 per barrel. “So what?” asks Laricina Energy’s advisory director, Neil Edmunds. “They produce the stuff at less than $20 per barrel. There’s still a good return in that.” The oil sands do not have “the highest lifting costs on the planet” – a view put forward by such popular economists as Jeff Rubin. “Cenovus’s cash costs are under $20 a barrel. Is that a high lift? A lot of enhanced oil recovery will cost more than that. There aren’t a lot of offshore operators doing less than $20 a barrel.” Now he warms to his topic. “Oilsands has never been a high lifting-cost business because it just wouldn’t be profitable if it were. If you aren’t making a big positive cash flow, you aren’t going to payout your huge capital costs. With a steam-oil ratio of two, you have to boil two barrels of water to recover one barrel of oil. You can recover one barrel of oil with one gigajoule of gas which costs $2.50, and that’s your number one operating cost. The price could go down to $40 and Cenovus would still be doing very well, thank you very much.” Cash flows notwithstanding, oil price differentials reflect the reality that North America’s pipelines are not in sync with their sources of supply. Originally designed to move lighter oils and refined products from the Gulf Coast to inland customers, liquids pipelines in the US are now running the wrong way. Today very few refineries in America’s mid-West can refine bitumen – only Denver, Colorado and Wood River, Illinois, come immediately to mind. The industry needs pipelines to transport product from the oil sands to the Gulf. Canadian bitumen has a fair amount of pipeline access to Cushing, Oklahoma, which is America’s traditional oil hub. But there isn’t a lot of pipeline capacity to move it down to the Gulf Coast, where the vast refining complexes represent a 7 million barrel-per-day market for the stuff. Not incidentally, access to the Gulf could also provide tidewater access to overseas buyers. Bitumen sits in tanks at Cushing, which doesn’t have the pipeline capacity to move it all south. On the positive side, the recent reversal of the Enbridge-operated Seaway pipeline from Cushing to the Gulf is helping. Seaway used to move refined products north from the Gulf Coast. Assuming a mix of light and heavy oils, today it can ship about 400,000 barrels per day of Northern oil south from Cushing. Supplies of Canadian oil are still on the rise, though. This is another partial solution. After it has been approved and constructed, the Keystone XL mega-project will solve much of the problem of moving oil from Cushing to the Gulf, but it will still be only a partial solution to the industry’s woes. According to Kosman, “in some ways, development of Keystone has already begun. TransCanada has begun to find ways to ship pipeline from Cushing down to the Gulf Coast, for example. There are a number of smaller initiatives trying to remove the glut at Cushing by moving product down to the Gulf coast.” He returns to his basic message: “The solution is not going to lie in a single mega-project.” Bertram observes that TransCanada has another asset – unused gas pipeline capacity – “that is now underutilized, and they need to look at the best way to deploy that asset, if they think it makes economic sense to do so.” In other words, convert some of the gas lines so they can ship bitumen blends to Sarnia or other parts east. Kosman agrees, and notes that line reversals in Ontario could be another part of the puzzle. “For example, Line 9, which takes imported oil from Montréal to Sarnia, could be reversed. You could sell Alberta oil to refineries that are now importing expensive heavier oil from Venezuela.” An Enbridge proposal to reverse a section of Line 9 – a segment between Sarnia and Westover, Ontario – is already awaiting regulatory approval. Initially, the reversal will transport only 50,000 barrels per day of western Canadian oil to Imperial Oil’s Nanticoke refinery, near Hamilton. Eventually, though, the line is likely to transport western Canadian oil to Montreal – a total reversal from the project’s original design. Built in the mid-1970s, the line has the capacity to move up to 245,000 barrels per day of imported offshore oil from Montreal. Because it would ship bitumen and other grades from Western Canada to Montreal, daily volumes would drop by as much as one-fifth. Another possibility would be to reverse the pipeline which carries oil from Portland, Maine to refineries in Montréal. That idea is under discussion, but boards of selectmen (New England’s equivalent of town councils) along the route are debating a proposal put forward by the Healthy Waters Coalition, an environmental group. The coalition worries that an oilsands spill into could cause a great deal of environmental damage. “There could be some problems with that pipeline,” Kosman deadpans. Irrepressible Alward While Kosman and Bertram believe in incremental steps, the irrepressible premier of New Brunswick has a big, bold vision. David Alward proposed converting an unneeded TCPL natural gas pipeline for bitumen transport, then constructing a line through Quebec to Canada’s biggest refinery and eastern Canada’s largest deep-water port at St. John. “Our government believes a national oil pipeline – bringing Western Canadian crude to St. John – is strategic to Canada’s national interests,” he said in a January speech. “It would open up new markets for one of Canada’s most important exports; help Canada get full and fair world market prices for its energy; and create new jobs and new opportunities right here in New Brunswick.” Warming to his subject, he said “I envision a West-East pipeline that can make New Brunswick Canada’s next energy power house. Because of Saint John’s deep-water port and Irving Oil’s world-class refining experience and capacity, New Brunswick can play a central role in connecting Canadian resources with growing world markets. That could mean thousands of jobs for our trades-people and billions of dollars of investment.” Both Kosman and Bertram approve. “The concept certainly seems to make sense,” says Kosman, before adding some notes of caution. “But will TransCanada be receiving appropriate toll rates for the project? Being able to export oil from the East Coast could certainly make the project attractive. You’d have to know what the project’s capital cost would be, how much TransCanada would have to charge shippers and so on….” Bertram is less reserved. “This is a project that would in many ways bring people in the country together. It would allow Eastern Canada to be less dependent on foreign oil. We always like to say that Canada is energy self-sufficient, but we ship a lot of product south of the border and we import a lot in the East. In true numbers, yes, we are self-sufficient. If you’re going to look at the actual products we’re consuming across the country, perhaps we’re self-sufficient, but we still have to bring in oil from Venezuela to Eastern Canada. Also, it would provide economic activity in one of the less affluent provinces. Having transportation systems that allow other jurisdictions to be buying Western Canadian crude oil to me makes an awful lot of sense.” Many environmental groups have warned about the environmental dangers of building pipelines. However, Robin Bertram takes the opposite point of view: The risk of environmental problems will diminish once the pipeline system has been rejigged. “Crude oil is being railed across the continent in larger and larger volumes,” he observes. “The pricing differentials are just so large that even when you transport relatively small quantities by rail, you can get a much better return on that product. So economically it makes a lot of sense. You’re now getting maybe hundreds of thousands of barrels being railed across the continent. From an environmental perspective, I’d much rather have it moving by pipeline.”