Where oil meets water: The final stop for the Energy East pipeline
SHAWN McCARTHY - GLOBAL ENERGY REPORTER
SAINT JOHN, N.B. — The Globe and Mail
Published Saturday, Aug. 31 2013
On a point of land jutting into the open waters of the fabled Bay of Fundy, Canada’s long-sought ambition to become a global oil exporter is coming into focus.
Here at Mispec Point, Irving Oil Ltd. and TransCanada Corp. plan to build a $300-million, deep-water marine terminal that would give Western Canadian crude producers their highly coveted direct access to world markets.
Currently, the industrialized tip of the wooded point serves as a hub for Canada’s energy imports.
It is home to Irving Oil’s Canaport facility, though which the company brings crude oil from around the world to feed its Saint John refinery. It’s Canada’s largest, processing up to 320,000 barrels a day.
On a calm day this week, a tanker from Husky Energy Inc.’s White Rose field in the Atlantic was moored offshore, offloading its cargo of crude into submerged pipes that lead to the refinery a few kilometres away in east Saint John.
But the world’s energy flows are changing dramatically, as new sources of oil and the shifting forces of supply and demand give rise to new routes for crude shipments.
Now, as North America’s oil and gas production boom takes off in Alberta, the U.S. Bakken and other areas, Irving is changing its focus at Mispec Point from importing crude to exporting it – to wherever in the world it can get the best price. In building the marine terminal here, Irving and TransCanada aim to end Canada’s dubious distinction of being the only major oil country whose producers do not have access to a deep-water port.
Mispec Point is the planned terminus for TransCanada Corp.’s proposed $12-billion Energy East pipeline – a project that would connect Western Canadian oil producers to the world’s largest supertankers, while providing a much-needed boost to this province’s tired economy.
It was an increasingly urgent necessity that drove Calgary and Saint John together.
The Energy East pipeline is the latest project that aims to break Alberta producers out of their landlocked market, which has resulted at times in logjams and deep discounts for Canadian crude and limits the potential for growth in the booming oil sands. Oil producers surprised even TransCanada earlier this year when they committed to send some 1.1 million barrels per a day of crude down the pipeline to refineries and export terminals in Quebec and Saint John.
Producers have good reason to focus on Energy East. Prospects remain highly uncertain for moving crude from Alberta westward through British Columbia via Enbridge Inc.’s proposed Northern Gateway, or south to the U.S. Gulf Coast through TransCanada’s stalled Keystone XL project that has become a cause célèbre in the battle over climate change in the United States.
Energy East will give western oil companies access to Eastern Canadian refineries, thus expanding their market. But “the real win for TransCanada and producers is to get the crude to Canaport where they can ship it,” Irving Oil refinery manager Mark Sherman said in an interview at the refinery, where he recently played host to Prime Minister Stephen Harper and Alberta Premier Alison Redford.
“Then, basically the world is your ocean as they say, and you can go to India, China, Europe, South Africa, America, the Gulf Coast ...”
Winning over the west
For Irving, the pipeline offers an important new source of lower-cost crude as refineries in the Atlantic basin struggle with high international oil prices, industry overcapacity and weak demand growth for refined products. Under the current plan, few permanent jobs will be created. But for the depressed city of Saint John, a major construction project with the possibility of industrial spinoffs provides a rare bit of good news.
New Brunswick worked hard to get in the pipeline game. When TransCanada first floated the idea of converting a portion of its natural gas mainline to bring western oil to eastern markets, it was Quebec City rather than this Maritime city that was seen as the likely end point.
The New Brunswickers had to persuade Calgary-based crude producers – who are used to dealing with giant international oil companies – to deliver large quantities of crude to Saint John, a hard-scrabble port where a secretive, family-owned business runs a one-refinery operation to feed a regional chain of gas stations.
When the project was announced in early August, TransCanada chief executive officer Russ Girling credited Irving Oil patriarch and chairman Arthur Irving for winning over producers. Prior to its effort to secure commitments from shippers, TransCanada had estimated the pipeline would carry between 500,000 and 850,000 barrels a day, and equivocated about the potential of reaching Saint John, rather than ending in Quebec City.
While Mr. Girling credited Mr. Irving for getting skeptics on board, the family scion certainly had a large supporting cast, including the company’s executive team, New Brunswick Premier David Alward and Saint John Mayor Mel Norton.
Saint John has more to offer than most Calgary oil executives had realized. It includes the largest and most sophisticated refinery in Canada, access to an ice-free port that could handle the world’s largest crude carriers, and a huge swath of port land that is zoned and ready for industrial development. Shippers can save up to $1.50 (U.S.) a barrel by loading on to the ultra-large carriers, compared to smaller ones that can reach Quebec.
“Those were just huge factors that they were just not aware of,” said Irving Oil refinery manager Mr. Sherman. “And once we made them aware of those, you could see this aha! moment where they said this makes a lot of sense from the point of view of where can they get to with their product.”
Perhaps most importantly, with the Albertans facing political uncertainty in the United States and British Columbia, New Brunswick offered all-party political support and a mostly-willing populace, although many environmentalists oppose it and First Nations want to be consulted.
Mayor Norton travelled to Calgary in May and met with TransCanada and oil companies to ensure they understood Saint John would welcome the Energy East project, a stark contrast to the chilly reception offered by some city officials to Kinder Morgan Inc.’s proposal to expand its pipeline into the Port of Vancouver.
“We went there with a very simple message: We would very much welcome this development coming to Saint John,” Mr. Norton said in an interview at his office overlooking the city’s waterfront. “It’s a place that doesn’t see economic development like this and quality of life as mutually exclusive.”
The city – and indeed the province – have struggled greatly since the recession, with Saint John suffering from the highest urban unemployment rate in the country.
Premier Alward – who lobbied aggressively for a Saint John terminus – has labelled the project a “game changer.” But it remains unclear how much actual economic benefit the city will see from the project, especially once the short-term gains from construction have ended Indeed, Mispec Point is something of a field of broken dreams for this industrial port city. Canaport LNG – a liquefied natural gas importation venture owned 75 per cent by Repsol SA and 25 per cent by Irving Oil – sits adjacent to the proposed Energy East site. It operates well below capacity after the shale gas boom in North America sent prices plunging.
Just as Canaport LNG was struggling with its startup in 2009, Irving Oil and partner BP PLC shelved a much-touted plan for a second refinery in the city, succumbing to the reality of brutal refinery economics in the Atlantic basin that forced the closing of some 20 plants on both sides of the Atlantic.
While cab drivers and other people in Saint John will tell you otherwise, Irving Oil insists there is no plan to revive the second refinery proposal once the pipeline brings Western Canadian oil to the city. Irving and TransCanada instead plan to locate the Canaport crude export terminal and adjacent storage tanks on land that was zoned for industrial use under that plan. The terminal would employ just a couple dozen workers – a sharp contrast to the many hundred that would work at a refinery.
Still, Mr. Sherman said the pipeline does offer important benefits for the existing refinery, which exports 80 per cent of its product into the highly competitive northeastern U.S. market. Irving has committed to take some crude volume off the pipeline, although it won’t say how much.
Shifting oil flows
The company traditionally imported all its crude by sea from sources such as the North Sea, west Africa and the Middle East; it has a longstanding agreement with Saudi Arabia for roughly 20 per cent of the refinery’s needs.
But in recent years, the refinery has greatly expanded its access to mid-continental North American crude, which has sold at a discount – at times a steep discount – to international sources. It can now bring in 120,000 barrels a day of so-called mid-continent crude, the growing volumes from Western Canada and North Dakota’s Bakken field that are increasingly shipped by rail.
Last year, the company installed a rail handling yard that can empty 40 crude-laden rail cars at a time, twice a day, for a total capacity of 80,000 barrels a day. It also receives up to 40,000 barrels a day by ship, after the oil is sent down the Hudson River from Albany, which has become a major terminus for crude-carrying trains.
The Irving refinery was the destination of the train carrying Bakken oil that derailed and exploded in Lac-Mégantic, Que., in early July, killing 47 people and levelling several downtown buildings. Mr. Sherman said the company regretted the tragedy but it will not affect its ability to get crude by rail because it primarily uses a Canadian National connection through Moncton, rather than the Canadian Pacific route that relied on the Montreal Maine & Atlantic Railway line through eastern Quebec and Maine.
The pipeline will greatly reduce Irving Oil’s reliance on rail, as the Energy East pipeline should be significantly cheaper. Bank of Nova Scotia economist Patricia Mohr recently estimated the rail costs from Alberta to Saint John at $15 (U.S.) a barrel, while pipeline costs would be more like $7 (U.S.).
However, the refiner plans to maintain its seaborne and rail import capacity in order to maintain its flexibility in sourcing the most inexpensive crude.
The Irving refinery can handle a mixed slate of crudes, but not a straight diet of oil sands bitumen. The company installed a unit know as a resid cracker in 2000 that expanded its output and allowed it to break down some heavier grades of crude. But to process bitumen, it would need a coker unit, similar to the ones featured in Fort McMurray upgraders and the most advanced refineries on the U.S. Gulf Coast.
At this point, TransCanada plans to ship “pipeline-ready” crude through Energy East whether to refineries or export terminals, in order to avoid the need for increasingly-expensive diluent that is mixed with bitumen to allow it to flow through the pipe.
Irving Oil will say little about prospects for future investment in the refinery that might be driven by access to the pipeline, including whether Irving would consider installing a coker to process bitumen. But Mr. Sherman – who spent 25 years working at Syncrude Canada Ltd.’s upgrader in Fort McMurray – said it is difficult to make a commercial case for a coker.
“They’re very expensive and we’re a smaller company,” he said. “I wouldn’t discount it as an impossibility but there has to be a business case in terms of how do you spend billions of dollars and get a rate of return.”
He added that it offends his personal sense of Canadian nationalism to be shipping raw bitumen out of the country rather than processing it here: “It’s like cutting down trees and shipping the trees instead of lumber, without getting any value out of it.” But profitability rather than sentiment will drive investment decisions.
Without precisely-defined, long-term benefits from the pipeline, some critics in Saint John are asking whether it is worth the risk from pipeline spills and increased tanker traffic in the ecologically important Bay of Fundy. Many environmentalists oppose it for the same reason they are seeking to block Northern Gateway and Keystone XL, as an effort to blunt expansion in the oil sands and prevent a major increase in greenhouse gas emissions.
From his base in St. Andrew near the Maine border, Matt Abbott cruises the bay in his small boat and monitors the environment. He said the tanker traffic is already disrupting whales and other marine mammals, and a doubling or tripling of traffic will only make matters worse. He also worries about tanker accidents and pipeline spills into spawning rivers that feed the bay.
“The benefits of this project to New Brunswick are being oversold,” said Mr. Abbott, who works with NBCC Action, the advocacy arm of the New Brunswick Conservation Council. “This isn’t a game-changer economically that it’s being called. Is the short-term infusion of cash and jobs worth the long-term risks associated with it?”
Former New Brunswick premier Frank McKenna – now deputy chair of Toronto-Dominion Bank – lobbied aggressively for the Energy East pipeline to reach Saint John. In an interview this week, he acknowledged the resulting permanent job creation appears modest at the moment, but added it is critical for the region to build its energy infrastructure.
“What it brings are options,” Mr. McKenna said. “Once you have the infrastructure, a lot of good things can happen.”
That rationale applies equally for Alberta’s oil producers, whose single export customer has been the U.S., which is rapidly reducing its reliance on imported crude.
With access to Mispec Point, they can travel the world.
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