A Pipeline to Asia

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Northern Gateway and the Export Market

By Bradley Kramer

If you build it, they will come.

It’s a motto made famous by the 1989 film “Field of Dreams,” but the sentiment holds true for the Canadian energy sector’s dreams for the country’s oil fields.

Asia represents a growing interest for oil companies seeking to expand their potential market. The leading contender of this fast growing market is China, which in December 2012 surpassed the United States in net petroleum imports, according to a recent study by the PIRA Energy Group, a global energy market analysis firm based in New York City. As Canada continues to expand oil production in the Alberta oil sands and the Bakken shale formation, oil companies are experiencing a bottlenecking effect, as current transportation infrastructure is inadequate to provide sufficient market access to their products.

“Every year for at least the last two decades, Chinese oil demand has increased in both absolute and relative terms, that is, as a percent of world total demand,” the PIRA study reported. “Since the price spike of 2008 and the following recession, U.S. oil demand has been declining in both absolute and relative terms, for all years except 2010. This, coupled with growing U.S. oil production, has led to a downward trend in U.S. net oil imports, while Chinese net oil imports continue to grow inexorably. December 2012 was the first time Chinese net imports exceeded U.S. net imports, and this trend will continue to grow for years to come.”

Today, virtually all of Canada’s oil exports go to the United States, according to Todd Nogier, manager of corporate and western access communications for Enbridge Inc. Because of the declining demand for oil in the United States, one of Canadaís major economic pillars is in need of buttressing.

The Canadian Energy Pipeline Association (CEPA) recently conducted an interview with Dr. Robert Mansell, academic director in the School of Public Policy and professor of economics at the University of Calgary. The exchange is published on the association’s website, www.cepa.com. In it, Mansell explained that the oil and gas sector accounts for about one-quarter of all non-residential investment in Canada and is one of the largest net contributors to government revenues.

“The lack of adequate market access, particularly to the fast growing offshore markets, means large and growing negative impacts on both the oil and gas segments of the industry, and this translates into significant negative implications for the economy,” Mansell says. “For example, in the case of crude oil, it is estimated that current crude oil transportation constraints are resulting in an annual $20 billion to $30 billion loss of revenues for Canada. This in turn translates into lower growth rates for incomes and employment, higher unemployment and reduced abilities of governments to fund social services and public infrastructure without higher levels of taxation or debt.”

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Building new pipelines to open market access in Canada would provide three key benefits to the country’s economy, Mansell explains, pointing to reduced discounting of the prices received for Canadian exports outside of oversupplied North American markets, increased revenue stability from diversifying its market portfolio and having infrastructure that would prevent the shutting in of production as a result of market dislocations.

The Northern Gateway Project will feature two 1,177-km pipelines from facilities near Edmonton, Alberta, to a marine port in Kitimat, British Columbia.

One project that could change the face of Canada’s oil export infrastructure is Enbridge’s Northern Gateway project, which is undergoing the rigorous approval process set forth by the Canadian government. The project includes two pipelines from central Alberta to British Columbia’s northern Pacific coastline, to Kitimat, between Vancouver and Alaska.

The twin pipelines will provide two-way transportation between the oil sands and Kitimat, which sits at the end of an inland channel that exits to the Pacific Ocean, an ideal location for the offshore port facility that Enbridge intends to build as part of Northern Gateway.

One pipeline will be able to transport 525,000 barrels per day (bpd) of oil to Kitimat, where tankers will load the crude to be shipped to various export markets — in particular, China.

The second pipeline will be able to transport 193,000 bpd of condensate to a facility near Edmonton, where it will be used to dilute thick crude oil — called bitumen — and enable pipeline transportation. In its natural state, bitumen can be as hard as a hockey puck. It needs to be diluted before it can flow through a pipeline. The condensate is a petroleum product derivative that will be imported from other countries.

The Northern Gateway pipelines will act as a virtuous cycle, enabling export of Canada’s crude oil by providing the conduit to move the product to the coast and necessary condensate to ensure the oil’s flow.

While California also presents a potential market for Canada’s crude oil exports originating from the Northern Gateway project, Asia is the primary target.

“Almost 99 percent of Canada’s oil exports go to the United States,” Nogier says. “We don’t have at this point in time the means to transport export oil off the continent. Recent studies have highlighted the importance of oil to the Canadian economy. In 2011, $60 billion (CAD) of oil was exported and nearly all of it to the United States.”

The cause for the declining demand for oil in the United States stems from fairly flat economic growth over the past few years, increased fuel efficiency and the expanded use of biofuels, Nogier explains. Combined with the exponential growth of domestic U.S. energy production, many experts believe that the world will soon see a time when North America is self-sufficient in oil. But this development creates a problem for the Canadian economy.
If one of your biggest customers stops buying as much product, you need to find new customers.

“Northern Gateway will provide access to some of the highest demand markets in the world,” Nogier says, “and that’s very important to producers and to the Canadian government and to Canadians.”

Enbridge will be the majority owner and operator of the Northern Gateway project, which is expected to cost $6 billion. The two pipelines will each span approximately 1,177 km. The oil pipeline will be a diameter of 36 in., whereas the condensate pipeline will be 20 in. While the project also comprises the construction of a marine port at Kitimat, the tanker operations will not be part of the Northern Gatewayís operations. However, the company has designed a robust safety system to ensure any emergency is met with swift action.

“This is a hotly debated topic in the province of British Columbia,” Nogier says. “There isn’t a lot of familiarity with oil pipelines in British Columbia, at least not as much as there is in Alberta. There have been a number of concerns raised as to the safety of transporting oil through pipelines, as well as offshore. Enbridge is engaged in a dialogue with British Columbians to gather their views and ensure they are aware of safety measures in place that are far above regulatory requirements.”

The proposed pipeline route crosses a number of territories that the First Nations have claimed in British Columbia, Nogier says, and Enbridge has engaged these communities as partners in the project. Nogier estimates there are 45 First Nation groups along the route, both marine and terrestrial, and they have been offered a 10 percent stake in the project. Dialogue has intensified with the First Nations over the issue of the safety measures that will be put in place along the pipeline and at sea.

The oil port at Kitimat will comprise a series of storage tanks to load and offload oil and condensate to and from shipping containers.

Enbridge will build a marine port at Kitimat, British Columbia, to export crude oil from the Canadian oil sands and Bakken shale play, as well as import condensate to be shipped to the oil sands to be used to dilute bitumen and aid pipeline flow.

“We intend to be first class in terms of safety at the port of Kitimat, where we have proposed a number of marine safety measures,” Nogier says. “The measures include having tug escorts through the Douglas and Principe channels, and we propose to install and facilitate additional navigational aids to ensure safety. There will also be emergency response stations throughout channel and at the port of Kitimat, and we propose to station personnel throughout the channels for a quick response if an incident were to occur.”

Enbridge also plans to institute a speed limit for oil tankers traveling through the shipping channels, which would thereby mitigate any wake behavior on water and reduce the risk to marine animals. Through these measures, Nogier says oil tankers would take about 10 hours to get from open ocean to the port of Kitimat.

The project awaits decisions by the Canadian National Energy Board and the Federal Cabinet in Ottawa. If all goes well, Enbridge expects to begin construction on the Northern Gateway project in 2014, with operations beginning in 2018.

“The regulatory process for the Northern Gateway has been the most thorough in Canadian history,” Nogier says. “Of all the material put on record and all consultation we’ve done, the planning stages have been more involved than any other project in Enbridge’s history. This is something we’ve worked hard at doing. It’s an important issue to British Columbians that we construct the project to the highest standards.”

Public interest related to the oil and gas industry has been on the rise in both Canada and the United States, and the Northern Gateway has generated a lot of attention and scrutiny regarding the regulatory process.

“We knew going into this project that it would be of interest to all Canadians,” Nogier says. “Northern Gateway has fueled the public’s interest in the regulatory process and the demand for Enbridge to ensure that safety is priority No. 1. That’s what Canadians expect, and that’s what we intend to deliver.”

The Northern Gateway project serves a need for Canada. One aimed at providing Canada a means to export its most valuable resource.

As part of the application process to the regulator, Enbridge conducted a number of studies, looking at the environmental and economic impacts of Northern Gateway,” he says. “One study from economists showed the impact on the Canadian economy was determined to be in excess of $300 billion to GDP over 30 years. Derived from operation of the pipeline, the increased revenue returns to producers and the reinvestment to operations, all of that would feed back into economy.”

As a result of pipeline bottlenecks in Canada, the country has suffered a price differential of up to $40 per barrel for its crude oil in North America compared to the crude oil price on the international market.

“That’s substantial lost revenue to Canadian producers and the government from royalties and taxes,” Nogier adds. “Northern Gateway will help address that price differential by moving western Canadian oil, but also oil from the Bakken shale play.”

Expanding pipeline capacity and increasing market access to Canadian oil is one way the country can address price differential, helping oil producers recoup prices that international producers are experiencing.

‘”Asian markets are some of the highest demand markets in world,” Nogier says. “China is on a path of greater investment in energy infrastructure. Canada is on China’s radar as a supplier and stable partner.”

Because of Canada’s government and labor environment, the country represents a stable investment climate for energy, according to Nogier. In turn, Canada looks at China as a strong trading partner.

“Northern Gateway is going to help Canada to tap markets in China, Japan and Southeast Asia in general,” Nogier says. “These countries are looking for stable regimes to do business with, and Canada is one of them.”

The University of Calgary’s School of Public Policy released a new study on Feb. 6 that indicates Canada has a short window to act. The study says the country only has two to five years to get its oil to Asian markets before economic opportunities narrow.

“There are a number of oil producing nations that can facilitate trade to China and Asia, as demand there is very high,” Nogier says. “High demand countries will look for sources for energy supply where it makes sense for them to get it. Canada has to make sure its resources are competitive and accessible. Canada has a very strict environmental assessment and regulatory process. Enbridge will go through the proper channels and assessments which are in place to make sure Northern Gateway is developed safely and to make sure it’s in the interests of Canada.”

Bradley Kramer is managing editor of North American Oil & Gas Pipelines. Contact him at bkramer@benjaminmedia.com.

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