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New Directions for North American Energy Infrastructure

New Directions for North American Energy Infrastructure

On Thursday, May 17th the Financial Times reported that Royal Dutch Shell CEO Peter Voser has said he expects US natural gas prices to double by 2015, but remain under pressure in the short term. Voser made these comments based on the fact that he sees more and more transportation options stemming from NatGas. The recent low in the price of NatGas of $1.90 on April 20th is probably the lowest price of the year, due to production shut-ins triggered after the closes below $2 from the 17th to the 20th of April.

Voser is correct in his assumption that more and more transportation options will rely on NatGas as we move forward. The largest annual trucking show in North America, the Mid-America Trucking Show, was held in Louisville Kentucky in March and featured a panel discussion on NatGas in trucking featuring famed petroleum investor T. Boone Pickens. The Conference Board of Canada reported in an April research paper that making the switch to NatGas from diesel would be a fixed cost of roughly $80,000 CDN per vehicle, but would save about $15,000 CDN per year over a 10-year period. Although North American NatGas refuelling infrastructure is not as mature as it needs to be to trigger a large-scale shift, change is coming.

In other transportation fuel news, Delta Airlines is buying a Pennsylvania petroleum refinery at a total cost of $250m because it estimates that it can save as much as $300m on annual jet fuel costs, which comprise ~29% of its annual operating expenses.

A major shift in Canadian energy supply was announced by Enbridge the week of May 19th when they announced a $100m plan to reverse the flow of their 240,000 bpd Line 9 pipeline to make it run from Sarnia to Montreal, as opposed to vice-versa. Originally constructed to bring western Canadian crude to East Coast markets in the 1970’s, the flow was reversed in the 1990’s because of the relative cheapness of foreign oil versus domestic. Now, however, with Alberta crude trading at a $17 discount to Brent it makes economic sense to use the higher-quality Canadian product as opposed to importing offshore oils like Brent from Europe or Gulf of Mexico blends. Enbridge has already filed an application with the National Energy Board to reverse the first part of the pipeline (9a) from Westover (near Hamilton) to Sarnia. With 9a flowing from Sarnia-Westover, supply can be brought to Imperial Oil’s 110,000 bpd Nanticoke refinery (near Port Dover on Lake Erie). Since ~25% of petroleum products sold in Ontario originate at Nanticoke, this should result in lower petroleum product prices in Ontario. Although, it remains to be seen how gas stations will adjust their margins or whether the Province of Ontario will use the boon to drivers as an excuse to raise the gas tax. Enbridge intends to file an application in late fall to reverse the rest of the pipeline (9b) from Westover to Montreal, and expect that the reversal will be available for service in early 2014.

Line 9 will be used to transport Edmonton PAR, a light, sweet crude. However, it could also be used, as former Premier Frank McKenna has pointed-out, to transport heavy oil to Saint John NB to the 300,000 bpd Irving refinery, the biggest in Canada. The Irving refinery could also process raw bitumen into synthetic crude with a coker unit addition. A coker unit ‘cracks’ (uses heat to separate heavier carbon sequences from lighter ones) heavy oil at ~480 degrees Celsius into 18-30% petcoke (used in the carbonification of iron into steel) and syncrude. The cost of this might not be feasible, though, as in 2007 Petro-Canada estimated that building a 25,000 bpd coker unit at their Montreal refinery would have cost about $1b.

Enbridge also announced a $400m project to expand the capacity of their Lakehead System mainline between source in Neche, North Dakota, to its terminal hub in Flanagan, Illinois (near Chicago). This project will include the expansion of their Alberta Clipper pipeline from the Canada-US border and Superior, Wisconsin from 450,000 bpd to 570,000 bpd, and the expansion of the Southern Access pipeline running from Superior to Flanagan from 400,000 bpd to 560,000 bpd. Both projects are dependent on the addition of pumping horsepower, not the laying of new pipe, so environmental impact should be minimal. The expected completion date for this project is mid-2014.

Due to the fragmented nature of the North American pipeline system, there is no easy way to ship oil from the middle of the continent (i.e. Alberta and the Dakotas) to the coasts where population is concentrated. Even though Edmonton PAR contains more energy per unit of weight at roughly the same sulphur content as European Brent, it still trades at a $17 discount due to pricing inefficiencies stemming from a lack of transportation options. If there was an easy way to get PAR from Alberta to Toronto or Vancouver access to the Eastern Seaboard and California / Asian markets would quickly self-regulate and the spread would be arbitraged away. However, since much Midwestern North American oil is geographically-bound to the region of origin, a supply glut has formed.

By. Hadaf Zubi




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