Enbridge hatches a plan to export more Canadian barrels, without building new pipelines
At its annual Investment Community Conference in New York City this week, Enbridge told analysts it has a plan to capitalize on the desperate need for more crude export capacity out of Western Canada.
Unlike its main competitor TransCanada, Enbridge has a much bigger focus on crude oil and liquids transportation. Its massive Mainline network is the world's largest crude oil pipeline network, transporting two-thirds of the country's exports and accounting for one-third of all US foreign oil imports. The collection of pipelines spans 27,600 km with an export capacity of about 2.85 million bbl/day, including natural gas liquids. About 500,000 bbl/day of those volumes are re-imported into Ontario and Quebec.
Line 3 Replacement - now the one and only approved pipeline expansion
Given the cancellation of Northern Gateway and expansion of the Trans Mountain Line, as well on-going delays on Keystone XL, Enbridge's replacement of Line 3 is now the only approved pipeline expansion on the books. Replacement of the 50-year oil line will increase export capacity by 370,000 bbl/day once completed. The company says over 80% of the pipe is already in the ground, and construction should be completed by next July. New line segments are expected to begin filling sometime in the third quarter, with total additional capacity to be put into service by the fourth quarter of next year.
Adding export volumes without building new pipelines
Enbridge also had some very good news for Alberta's producers this week. The company says it can squeeze another 450,000 bbl/day out of its Mainline, without having to build new pipelines.
Barrels of light oil from the Bakken shale that currently tie-into the Mainline at Cromer, Manitoba, could be cut back or even reduced to zero, allowing for an additional 100,000 bbl/day of Canadian crude to be delivered into the US. The company is also looking at upgrading its Line 4, adding drag reducing agents and optimizing its crude slate to free up another 100,000 bbl/day of capacity. Those changes are expected to be phased in over the next two years, with another 100,000 bbl/day of system upgrades expected to be completed by 2022.
Another major change is the reversal of its Southern Lights Pipeline, which currently delivers condensate from the Midwest region into Edmonton, for use as diluent for heavy oil transport. Enbridge says condensate production out of Western Canada is growing, reducing the need for US imports. Reversing the line is subject to regulatory approval, but could be completed by 2023. If approved, that's another 150,000 bbl/day of light oil export capacity out of Western Canada.
Aside from its Mainline volumes, Enbridge also says it can boost capacity on its Express Line into the Rocky Mountains region by up to 60,000 bbl/day through the addition of chemicals and upgrades to pump stations. Those could potentially be completed by the end of next year.
Canada's total export capacity by pipeline is about 3.5 million bbl/day, insufficient to handle current production rates. The national output hit a record 4.4 million bbl/day in August, and is expected to rise by another million barrels by 2023, with virtually all of those new barrels needing to be exported. Total Canadian exports peaked at about 3.7 million bbl/day at the end of last summer, including over 200,000 bbl/day shipped by rail.
Changing business practices on the Mainline
Unlike other export pipelines, the Mainline network does not have contracted volumes and instead asks producers to nominate how much crude needs to be shipped every month. Enbridge then prorates those volumes depending on demand.
The process has drawn criticism from some Alberta producers who accuse other producers of inflating nominations, in order to secure enough space on the line, potentially leading to empty "air barrels." Producers who are allocated extra barrels can also fill up the space will volumes held in storage tanks, purchased at bargain-basement prices.
Enbridge has long denied the allegations, claiming its Mainline consistently runs at capacity. The company attempted to implement a verification process for its monthly nominations, which was later abandoned due to pushback from oil producers. However, the company now says new tolling agreements must "meet evolving shipper needs." The company is looking at setting up 20-year contracts on its Mainline, with only 10% of space reserved for spot volumes.
The new procedure requires regulatory approval, but could be in place by the middle of 2021.