Exclusive Interview: Enbridge - Northern Gateway Pipeline Project

Build it and they will come

An exciting pipeline project spearheaded by Enbridge aims to close the gap between Canada’s significant oil production capacity and its proximity to the world’s largest and growing oil markets. Enbridge’s Northern Gateway Pipeline is generating a significant amount of interest, as it should. As a project of national strategic importance, it has the potential to significantly diversify and boost the Canadian economy by allowing Canada to take advantage of higher world oil prices.

Enbridge is in a variety of businesses. Delivering energy for some 160 years, Enbridge Gas Distribution services over 2 million customers primarily in central and eastern Ontario as well as southwestern Quebec. Calgary-based Enbridge also has an extensive and growing portfolio of renewable and green energy, including solar, wind and geothermal energy. And, for the past 60 years, Enbridge has transported crude oil. Enbridge operates the longest crude oil pipeline system in the world, with about 15,000 kilometres of pipelines running from the N.W.T and northern Alberta to the American Midwest, as far east as Montreal and as far south as Cushing Oklahoma. This system enables the delivery of 2.5 million barrels of crude oil per day.

As it stands currently, the majority of pipeline systems in North America—including Enbridge’s— tend to move in the same direction and to the same markets, flowing from the western Canadian sedimentary basin to inland markets in the U.S. and eastern Canada. There is very little crude oil capacity off of Canada’s massive west coast, which is an open door to the Pacific Rim. This effectively limits Canadian oil producers to a single customer outside of the country, with about 99 per cent of Canada’s petroleum exported to the U.S. (according to National Energy Board data).

The Northern Gateway Project aims to connect Canada’s prodigious Canadian oil sands, its vast Western coastline and its shipping potential to provide access to the Pacific Rim’s international markets and large volume demand opportunities.

The pipeline itself will run 1,177 kilometres from the Edmonton region to a port at Kitimat, B.C. Measured at 36 inches in diameter, it will carry an average of 525,000 barrels of petroleum a day westbound.

There will be an additional eastbound pipeline that will carry condensate from Kitimat to the Edmonton region. The pipeline capacity will be an average of 193,000 barrels of condensate per day, a material used to thin heavier oil for pipeline transport in the oil sands.

“Northern Gateway is a project that will open access to growing markets,” says John Carruthers, President, Northern Gateway Pipelines. “It links our world class resources, the third largest on the planet, to what is the fastest growing and largest market in the world, the Pacific Rim, effectively doubling the size of the market Canada can access.

From an economic perspective, the project is strategic for Canadians for linking our world class resource to that large and growing market. It is in our interest to have that market competition and to mitigate the risks of having just a single customer.”

Canada must also protect itself from being tied to one customer whose demand has, according to conservative estimates, plateaued and, by liberal estimates, to have been declining. “As our supply increases, it is crucial that we access critical markets,” says Carruthers. “We see markets around the world trading at a premium, so we needed an alternative market and access to large growing markets that have premium pricing. What that translated into, based on historical premium pricing, is an increase of two to three dollars for every barrel produced in western Canada not just those shipped on the Northern Gateway pipeline, but all barrels. That translates into $28 billion of additional value in the first 10 years alone to the Canadian industry.”

In a speech delivered to the Calgary Chamber of Commerce in November, 2010, Patrick D. Daniel, Enbridge President and CEO, outlined the importance of the accessing the Pacific Rim in terms of the Canadian economy.

“Japan, China, India, all expanding economies with a long-term projected uptrend for sustained growth, and ones that we absolutely need to take advantage of in Canada.

“Consider this key geographic fact: Canada’s west coast ports are two days closer to the Far East than other ports in North and South America, an important consideration in a world where the competitiveness of your supply chain is a defining success factor. Our nation’s Pacific Advantage is clear.”

According to Carruthers, the project will have a pricetag of about $5.5 billion, part of which will be paid by oil producers who are securing first rights on the pipeline’s capacity.

Application

The project is attracting the scrutiny of people and groups who are concerned about environmental impacts of energy development, and pipeline development—concerns that Enbridge takes very seriously. In 2010, Enbridge experienced a break on one of its pipelines in Michigan, an event Daniel described as “significant” and “humbling”.

Although its safety record is emulated by its peers, Enbridge’s review application gives a new definition to the word thorough. In May, Enbridge filed the regulatory application for the project with the National Energy Board. More than 20,000 pages of documentation, it was the largest application the NEB has ever received, illustrating the prioritization of public discussion and consultation for the company.

Essentially, the next 18 months will see frequent consultation addressing the project’s potential impact on the environment and marine safety. A project of this magnitude requires a great deal of consultation to ensure it is done correctly the first time. “With the hearings starting at end of June 2012, we might see a decision regarding project in early 2013.”

“We are right in the middle of a Joint Review Panel (JRP) made up of National Energy Board and Canada Energy Assessment Agency, a very thorough public review process,” elaborates Carruthers. “The Joint Review Panel went out along the transportation corridor and asked in the communities if we had addressed all of the issues or if there was further information required. That information was incorporated into a request for further information from Northern Gateway which we then filed.”

The size and scope of the regulatory process is estimated to cost $250 million, and potential shippers—the oil producers and refiners who will use the pipeline—are helping finance half of the regulatory phase. Once that phase is complete, more detailed engineering will be required, and potential shippers will pay for 50 per cent of that price tag as well.

The eagerness of shippers to provide funding for this stage illustrates the pipeline’s demand; upon completion of the detailed engineering phase, those shippers will be given the opportunity to sign a long-term shipping agreement, a 15- or 20-year Take-or-Pay shipping agreement which gives them first rights of refusal on the capacity on the pipeline at a prefential toll.

VP Commerical Paul Fisher can’t disclose the number of companies already involved, but would say that response to the pipeline from oil producers has been “very positive” and is comprised mostly by Calgary-based crude oil producers and Asian refining interests. Out of the oil export pipeline’s 525,000 bpd capacity, 500,000 bpd has been subscribed, similarly, 175,000 bpd on the condensate import pipeline has also been subscribed. Since the remaining 25,000 on the crude export pipeline (17,500 bpd on the condensate import pipeline) is mandated by the NEB to be set aside for short-term use, that places Enbridge at 100 per cent capacity for the project.

This customer commitment is a big step forward and lays out the commercial arrangements that will set out the path forward with shippers from now to final approval and construction. There agreements signify a lot of work that has gone into negotiation and cost estimating and scoping of this project.

This commercial model will now go into the overall submission to be considered by the JRP with hearings scheduled to start in January, 2012 and expected to be concluded by the end of the year.

Economy

In addition to the strategic importance of Northern Gateway, the project will have a sustained economic impact. According to Enbridge, reliable independent estimates of the project’s impact over thirty years say it will deliver to all Canadians an additional $270 billion increase in Canada’s GDP. By connecting Canada’s   competitive advantage, the oil sands, with Pacific Rim markets, the National Gateway project gives Canada the key to unlocking the full potential of our valuable resource.

www.enbridge.com

By Anna Guy