Despite Spills, Enbridge Pushes For More Oil Sands Pipelines
6/26/2012
Alberta's three oil sand deposits are known as the Athabasca Oil Sands, the Cold Lake Oil Sands, and the Peace River Oil Sands. (Photo credit: Wikipedia)
Last week Canadian pipeline giant Enbridge suffered a leak on its Athabasca pipeline that carries 350,000 barrels of crude from the Alberta oil sands region over the border into the United States. Roughly 1,400 barrels of oil escaped the line in a rural area. The oil is being cleaned up. Harder to clean up: the reputational damage to a company that tries to depict pipelines as a safe and effective way to get Canada’s oil sands crude to market.
Enbridge, among its $34 billion in assets, owns the Athabasca and Wapasu lines, which together import 700,000 barrels per day of oil sands crude into the U.S. “We are the largest developer and operator of pipelines out of the oil sands,” Zupan told me in an interview a few days before the recent leak.
What’s more, Enbridge moves a total of 1.2 million bpd to the U.S. from Canada. “If Enbridge was a country we would be the largest importer to the U.S.,” says Zupan. “13% of total U.S. imports come through the Enbridge system, more than from Saudi Arabia.”
Adding in conventional Canadian crude and oil from the Bakken formation of North Dakota and Montana and Enbridge’s U.S. pipeline system handles more than 2 million bpd and covers thousands of miles.
Unfortunately no giant system can be 100% leak-proof. In addition to last week’s 1,400 barrel spill, in 2010 an Enbridge line leaked 20,000 barrels into Michigan’s Kalamazoo River. The river cleanup cost roughly $700 million so far. (In contrast recall that BP‘s Macondo blowout was leaking 50,000 bpd into the Gulf of Mexico, for a total of roughly 2 million barrels.)
The new spill doesn’t help the p.r. campaign that Enbridge is waging in Canada to seek approvals for its Northern Gateway line that would carry oil sands crude 650 miles from Alberta to the Pacific coast port of Kitimat — crossing pristine wilderness and lands traditionally held by First Nations tribes.
As part of $3 billion in expansion projects, Enbridge also plans to expand the line that leaked into the Kalamazoo as well as “twin” its existing Athabasca and Wapasu lines, doubling their capacity. Within five years Enbridge hopes to be bringing 2 million bpd of oil sands crude into the U.S. to feed refineries like BP’s Whiting, Indiana plant that have undergone costly overhauls to be able to break down the heavy crude.
And Enbridge won’t be the only one. Zupan thinks the northern stretch of the Keystone XL line will get built. It is to carry another 800,000 bpd from the oil sands to the U.S.
Environmentalists, naturally, oppose any development of the oil sands, which contain more heavy metals and contaminants that conventional crude oil. “Tar sands oil corrodes pipelines, creating a greater risk of devastating oil spills along the route,” said Danielle Droitsch, senior attorney with the Natural Resources Defense Council in a statement last week. “We cannot afford to ignore the climate and environmental dangers that come with the increasing amounts of tar sands oil being pushed into the United States.
For all the hate that environmentalists direct toward the oil sands, the pipeline companies love them. The resource is enormous enough to support production of 4 million bpd for 150 years. They know that the pipelines they lay now will wear out and have to be replaced long before the oil sands are depleted. And because of the nature of oil sands development they know that once an oil sands project is built and starts producing, it’s not going to be shut down.
“It doesn’t have an on or off switch based on the price of gas or oil today. You may be chasing cash flow, but it’s going to flow,” says Terrance McGill, president of U.S. subsidiary Enbridge Energy Company (click here to see an org chart of Enbridge’s convoluted corporate structure).
Witness ExxonMobil’s giant Kearl development. Exxon expects to finish the first 100,000 bpd phase of Kearl later this year at a cost of roughly $10 billion. In time, and after two more expansions, Kearl will produce 350,000 bpd, and with more than 5 billion barrels of recoverable resources, will be able to keep it up for 40 years.
Because of this massive upfront investment, oil sands are very different from America’s crop of shale plays like the Bakken, Marcellus and Eagle Ford. A good well in the Bakken might start off flowing 3,000 bpd, but rates fall off more than 50% in the first year. To keep production up, drillers have to keep drilling, and that decision to drill or not to drill is informed by today’s oil and gas prices.
There’s no such quandry with oil sands. The pipeline companies know it will be produced, and the refiners know it will be there for them to refine. Refiners in the Midwest and have upgraded to take oil sands crude, while those down on the Gulf Coast and California see it as a vital replacement for other heavies that are getting more scarce or unreliable like those from Mexico, Venezuela or California’s Kern River basin. ”If they’re not available, we need another option,” says Zupan. The oil sands, “is where the heavy crude is coming from.”
The U.S. would be stupid not to take full advantage of this reliable oil supply to the north.
Enviros are worried about spills and the environment, and that is a fair concern given recent mishaps. But pipelines remain by far the safest way of moving oil. According to the Department of Transportation’s pipeline safety division:
Pipelines are the safest and most cost-effective means to transport the extraordinary volumes of natural gas and hazardous liquid products that fuel our economy. To move the volume of even a modest pipeline, it would take a constant line of tanker trucks, about 750 per day, loading up and moving out every two minutes, 24 hours a day, seven days a week. The railroad-equivalent of this single pipeline would be a train of seventy-five 2,000-barrel tank rail cars everyday. These alternatives would require many times the people, clog the air with engine pollutants, be prohibitively expensive and — with many more vehicles on roads and rails carrying hazardous materials — unacceptably dangerous.
According to Dept. of Transportation data, pipelines carrying hazardous liquids average less than 1 hazmat incident for every billion ton miles. That compares with 20.5 incidents per billion ton miles for rail transport and 650 incidents for trucks.
Besides, it’s not as if blocking construction of Keystone is making Canada rethink whether or not it wants to develop the oil sands. “Canada is a separate country and they’re not real hip on getting lectured to by the U.S. on what they should do with their country,” says McGill. “The government of canada looks at the rejection of Keystone XL and figures, ‘we need another market,’” says McGill.
Enbridge has already been working on that. For a decade it has been planning its Northern Gateway line west to the coast of British Columbia. The project has the support of Canada’s Prime Minister Stephen Harper. In April, Harper said of President Obama’s rejection of Keystone XL: “Look, the very fact that a ‘no’ could even be said underscores to our country that we must diversify our energy export markets,” Harper said.
“We cannot be, as a country, in a situation where our one and, in many cases, only energy partner could say no to our energy products. We just cannot be in that position.”
Enbridge says it’s been working to smooth the path of the Northern Gateway by offering the “First Nations” tribes between the oil sands and the Pacific coast a 10% equity stake in the $5 billion-plus pipeline, a stake that would generate generous dividends for decades to come. Enbridge says it has garnered support of 60% of the tribes living near the path of the line. Critics dispute that and say no pipeline is worth threatening salmon, seals, bears, whales, eagles, rivers and forests.
Who knows if Northern Gateway will get built, but as McGill says, “Oil sands is a 150-year resource with 185 billion barrels of recoverable reserves. We’ve got time. You’ve got to have patience.”
Meanwhile, Enbridge is also heavily involved in the second-biggest boom spot — the Bakken formation of North Dakota.
Bakken oil is very different from the diluted bitumen that comes out of the oil sands. Bakken oil is light and low in sulfur and very easy to refine. Oil sands stuff is very thick, almost asphalty. As a result, even though oil sands pipelines pass pretty close to the North Dakota and Montana home of the Bakken, Enbridge says it can’t load Bakken oil into the system that carries bitumen. “There’s two different markets, light and heavy,” says Leon.
And drilling in the Bakken is ramping up fast. From just 300,000 bpd in 2010, North Dakota is set to surpass both California (540,000 bpd) and Alaska (555,000 bpd) this year to be the second-most oil producing state after Texas. And they’ve only just gotten started. Myriad analysts predict the Bakken to hit 1 million bpd within five years.
Enbridge has expanded its Bakken pipelines seven times in as many years and still can’t keep up with demand. Until it can complete its next $1 billion expansion, the company is building a rail loading terminal that can get 80,000 bpd out of the region.
Moving oil by rail is not only less safe, but far more expensive than pipelines — about $8 per barrel versus $2 by pipeline.
Yet buyers are still willing to pay that extra freight, because bottlenecked Bakken drillers are willing to sell their oil cheap. Enbridge says that among refiners that process light crude, the St. James refinery near New Orleans has recently been buying Bakken crude for a $29 discount relative to the price it would otherwise have to pay for Louisiana Light Sweet crude (a benchmark crude that usually goes for slight premium to West Texas Intermediate). Even after paying the rail freight, St. James is getting cheap oil
This is a market inefficiency that will only last until more pipelines are built to get more crude to market, at more reasonable (i.e. higher) prices.
This was the rationale behind Enbridge and rival pipeline giant Enterprise Products Partners teaming up last year to buy the Seaway pipeline from ConocoPhillips for $1.2 billion. Conoco had for years been using Seaway to move crude from the Gulf Coast north to Cushing, Okla. But this was the opposite of what the market needed, and only worsened the bottlenecks. Oil producers throughout the mid-continent naturally pleaded with Conoco to reverse Seaway, but it refused, saying a reversal would cost too much (besides, Conoco’s midwestern refineries profited from the cheap bottled up crude).
Enbridge and Enterprise have already reversed Seaway to move 150,000 bpd of oil south to the gulf. The companies expect to “twin” the Seaway pipe to carry 400,000 bpd by the end of 2013, and then expand it again, perhaps to as much as 850,000 bpd.
TransCanada, which doesn’t need that elusive White House approval to build the lower stretch of the Keystone from Cushing to the gulf, expects that line to add 700,000 bpd of capacity.
All told the new lines could add more than 1.5 million barrels of new daily oil deliveries to the gulf refineries — all of it from North American fields. The Enbridge guys aren’t worried a bit about competition from Keystone. Says Zupan, “There’s so much production growth going on that there’s room for both of us.”
These aren’t the kind of guys who worry too much about the effect of oil sands development on global warming. “Oil sands represents 1% of greenhouse gas emissions,” says Zupan. “Even if we produced all of it today it would raise the global temperature by .6 degrees over 50 years,” says Zupan.
It doesn’t matter if that’s accurate, where Zupan got his numbers from, or whether .6 degrees is really a lot or a little. Of course pipeline companies are of the opinion that moving more oil and gas is better. (Do you ask your plumber for advice on how long a shower you should take?)
The U.S. is not going to just stop using oil. And as we continue to be addicted to the stuff we have to be honest about where we get it. Venezuela’s heavy oil is no “cleaner” than the stuff from the oil sands. Nigeria’s pipelines spring a lot more explosive leaks than America’s. Iranian crude supports mullahs that want to wipe out Israel. Russian crude supports Putin’s autocracy. Saudi crude backs perhaps the most misogynistic and least free regime in the world. We need them all, for now. But with the massive supply growth from Canada and the Bakken, North America could potentially become self sufficient in oil within 15 years. Shouldn’t we try?
http://www.forbes.com/sites/christopherhelman/2012/06/26/despite-spills-...
