TransCanada’s Energy East faces hurdle as U.S. oil boom swamps market

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As TransCanada Corp. prepares to file for regulatory approval for its $12-billion cross-country pipeline project, booming U.S. oil imports are creating a new challenge: a domestic market saturated with low-cost crude.

The Calgary-based company expects to file its Energy East application with the National Energy Board later this month to move some 1.1 million barrels per day of western Canadian crude to eastern refineries and export terminals near Quebec City and Saint John, N.B.

The company, along with the Harper government and boosters in Alberta and New Brunswick, have draped a Maple Leaf flag around the proposed project.

Proponents say it will displace less-secure, higher-cost oil from outside North America with Canadian crude, thereby providing new markets for western producers and cheaper, more reliable supplies for refineries in Quebec and New Brunswick.

But that domestic market is quickly changing.

American crude exports to Canada soared to 387,000 barrels per day in June, according to U.S. government data.

While some one-time factors inflated those numbers, imports from the States into Canada – primarily Ontario, Quebec and the Maritimes – have risen to well over 250,000 barrels per day on a sustained basis.

At the same time, Enbridge Inc. expects to start up the reversal of its Line 9B next month, which will bring 300,000 barrels per day of crude from western Canada and the United States into the province of Quebec, home to Suncor Energy Inc.'s Montreal refinery and Valero Energy Corp.'s plant at Lévis.

"The Enbridge line plus U.S. exports pretty much fills up whatever the eastern Canadian refineries need," said Amrita Sen, chief oil analyst at London-based Energy Aspects consultancy. "So, that Energy East pipeline could be used to export Canadian crude, but I don't think eastern Canadian refineries are going to need western Canadian crude because they would have lots of supply well before that."

Suncor, Valero and Saint John-based Irving Oil Ltd. have all expanded their ability to bring crude from the U.S. by rail, and are increasingly importing by ship from the Gulf Coast. Suncor and Valero say they will be running a full slate of North American crude by early next year. Irving's 300,000 barrel per day refinery also has had an increasing diet of American crude, though the New Brunswick company remains a key backer of Energy East.

U.S. producers are prohibited from exporting crude except to Canada. Texas is facing a glut of light oil due to rising volumes in the Eagle Ford and Permian Basin and is eager to find new markets. Because American maritime laws limit the ability to ship to the U.S. east coast, Canada is a targeted market.

TransCanada is already facing challenges to its Energy East proposal from environmental groups in Quebec, and is keen to portray the project as a major benefit to the province to counter political opposition. The company says Quebec and New Brunswick will benefit from both the construction activity and from displacing higher-priced imports from politically unstable parts of the world.

"The Energy East national pipeline connection could push out crude oil currently imported from overseas and help ensure Canadians receive greater value for their domestically produced oil," said TransCanada spokesman Davis Sheremata. "Eastern Canada currently refines more than 640,000 barrels a day, of which 86 per cent of its refinery feedstock is imported from countries including Saudi Arabia, Nigeria, Venezuela and Algeria."

But a growing source of those imports is the United States, while OPEC's market share is falling sharply. And it will fall even further when Line 9B starts up.

Mr. Sheremata noted that shippers have committed to enter into long-term contracts for 90 per cent of the 1.1 million per day capacity, and that the pipeline could displace rail traffic. The three refiners in Montreal, Lévis and Saint John can now bring roughly 100,000 barrels per day of crude by rail to their plants.

Energy economist Jackie Forrest, of ARC Financial Corp., said shippers will continue to see value in the pipeline.

"By the time Energy East happens in 2017, or 2018 to Saint John, it won't be about replacing offshore crude, but it will be about delivering North American crude more efficiently to eastern Canadian refiners," she said. "There is an economic benefit by having them access lower cost crude than would be the case if they were relying on rail or tanker from the Gulf Coast."