Enbridge eyes Gulf route
Demand growing; Buying assets seen as better plan than building pipeline
Jon Harding, Financial Post
Published: Thursday, April 05, 2007
CALGARY - Enbridge Inc. is accelerating plans to satisfy a growing thirst for Canadian crude among refineries on the U.S. Gulf Coast and would rather buy existing assets in the United States than build a $4-billion direct pipeline link between Alberta and Texas.
"The U.S. Gulf seems to be the [market] that has caught the imagination of producers the most right now," Enbridge president and chief executive Pat Daniel said yesterday. "Our ideas, while conceptual, are moving ahead very rapidly."
The U.S. Gulf is home to about half the refining capacity in the U.S., but before last year no pipelines linked Canada with that market. Mr. Daniel said heavy oil producers in Alberta have been watching demand for Canadian crude rise along the Gulf since small volumes began trickling all the way south last year through Enbridge's Spearhead pipeline, which feeds into the oil hub at Cushing, Okla.
An Exxon Mobil Corp. pipeline also began delivering volumes of Canadian heavy oil from Illinois to refineries in Louisiana.
Mexico's major oilfields are in decline and Venezuela, traditionally a large supplier to the U.S. Gulf, is shrouded in political uncertainty -- two factors also contributing to the growing demand for oil from Canada.
Those conditions have meant the prices Canadian producers are getting from Gulf Coast refiners, who use the crude to churn out gasoline, diesel and jet fuel, have risen, with the discount between Canadian heavy oil and the benchmark for light oil -- West Texas Intermediate, which is set at Cushing -- narrowing dramatically. The gap -- as high as 40% to 50% in the winter of 2004 to 2005 -- shrank to less than 25% last month.
Mr. Daniel said a so-called bullet line between Fort McMurray and Houston, first talked about last year, remains an option Enbridge is looking at "seriously."
"I wouldn't say it's the leading option today, but it's definitely an option," he said.
The 3,300-kilometre pipeline carrying upwards of 400,000 barrels a day would represent a massive undertaking just as Enbridge pushes ahead with major expansions of its existing oil pipeline system between Alberta and the Chicago area.
It would also go head-to-head with a plan by privately-held Altex Energy Ltd. of Calgary, which is proposing a US$3-billion pipeline to move 250,000 barrels a day from Alberta to the Gulf. Enbridge rival TransCanada Corp. is also looking at ways to ship oil from Canada to the U.S. Gulf.
Mr. Daniel said a better solution could be acquisitions of existing pipelines south of Cushing, some of which Enbridge would have to reverse because today they move oil imported by the U.S. north from the Gulf to Cushing.
Enbridge doesn't currently own any assets south of Cushing.
"I'm being a little evasive because we're evaluating a lot of existing assets and we don't want to tip our hand," Mr. Daniel said.
Robert Hastings, a pipelines analyst at Canaccord Adams, said with costs to build energy projects climbing, making acquisitions would be a more economic alternative for Enbridge as oilsands producers attempt to move growing output to new markets, including the U.S. Gulf.
"It'd be a lot easier and faster to take an existing asset and expand it than trying to start something from scratch and getting the new rights-of-way," Mr. Hastings said.
The U.S. Gulf Coast represents an almost limitless market for Canadian producers, said Steven Paget, an analyst at FirstEnergy Capital Corp.
"We're shipping oil to Texas, which is kind of funny when you think about it," he said. "It looks like we're going to ship a lot more -- and Enbridge has some ideas about how to get it there."
© National Post 2007
