March 24, 2018
Central to Enbridge’s New Minnesota Pipeline Request is How Much Oil is Needed
By Mike Hughlett
At Flint Hills Resources’ sprawling refinery in Rosemount, Enbridge’s proposed new oil pipeline is seen as vital. Flint Hills wants to increase production there, but says it needs more oil to do so and Enbridge is its main supplier.
Enbridge says its six pipelines across northern Minnesota are so full that oil is being rationed, hurting refineries across the Midwest including Flint Hills. Enbridge wants to spend $2.6 billion to replace its aging and corroding Line 3. It says without the increased capacity from that project, the rationing — or apportionment as it’s known in the oil business — will just get worse.
“The current Enbridge Mainline fails to meet refinery demand for crude oil, despite a series of expansions over the last 15 years,” Neil Earnest, a consultant for Enbridge, said in testimony filed with state regulators.
And the company forecasts continuing growth in Canadian oil production well into the 2030s, even as changes in the global auto market portend weaker gasoline demand and national experts have predicted market changes because of that.
The need for that oil will play a key role when the Minnesota Public Utilities Commission decides on Enbridge’s request to build its new Line 3, a decision expected in June.
The Minnesota Department of Commerce — tasked with looking out for the public interest in pipeline matters — said the need for Enbridge’s oil isn’t enough to trump the potential risks to society, especially oil spills in pristine waters and wildlife areas.
Further, Commerce has questioned the accuracy of Enbridge’s forecast of future need and so-called negative effects of rationing.
For the oil industry, apportionment is evidence of “a system not running properly,” said Jake Reint, spokesman for Flint Hills’ Pine Bend refinery in Rosemount, one of the largest in the Midwest. Flint Hills is an arm of Wichita-based Koch Industries.
Reint said the refinery is not running as efficiently as it should and continued apportionment could lead to canceling future projects.
Flint Hills has spent about $750 million in upgrades at Pine Bend over the past five years, with some projects still ongoing (and oil output increasing). Another $600 million of investments are planned.
They would allow Flint Hills to further increase production from around 300,000 barrels per day now up to 339,000 barrels per day.
“Without the crude oil, it just doesn’t make as much economic sense,” Reint said.
Canada is the biggest source of U.S. oil imports, and Enbridge’s Minnesota pipeline corridor is the main artery of Canadian crude.
The Minnesota pipeline corridor delivers about 70 percent of the crude oil required at Midwest refineries served by Enbridge, the company says. It would not break out how much is used in Minnesota.
More than 20 percent of the oil flowing through Minnesota goes to the middle of the country or the Gulf Coast, routed through Enbridge’s big terminal in Superior.
As Canadian oil production has increased in the last several years, pipeline backups have followed. “Since 2014, we have been in almost continual apportionment,” Earnest, the Enbridge consultant, said in an interview.
For much of 2017, Enbridge’s apportionment was about 20 percent for Canadian heavy crude, meaning oil producers could have shipped 20 percent more given their own supply coupled with demand from refineries downstream.
The current Line 3, because of its age, can only run at 51 percent of its 760,000 barrel-per-day capacity. A replacement would restore full flow, and allow for 155,000 barrels per day more if eventually needed and approved by regulators.
Without a new Line 3, Enbridge forecasts apportionment of over 20 percent this year through 2020, rising to over 30 percent in 2021 and beyond.
Commerce questions the accuracy of Enbridge’s oil forecasts. Demand for gasoline and diesel fuel, it says, is likely to fall in the long-term as electric vehicles take off and fuel efficiency grows in traditional cars.
Crude demand will be dented, it said in a regulatory filing, potentially causing an oil glut and pushing down petroleum prices: “Global oil oversupply clearly could reduce demand for transportation of crude oil on the Enbridge Mainline which, in turn, could reduce [Enbridge’s] modeling projection of the use of that system.”
The wild card in the oil demand outlook is the future of electric vehicles (EVs).
Now, they’re a very small market. But if costs for EVs fall and demand for them grows as expected, they could displace oil demand and force automakers to increase the fuel efficiency of gas and diesel vehicles, according to a 2017 Wood Mackenzie report.
“For oil producers, the threat of EVs is existential,” the report said.
Boston Consulting Group, in a study released last month, said electric cars could represent more than 20 percent of new vehicle registrations by 2030. The company’s research suggests gasoline demand would drop by 10 to 15 percent by 2025, and by 30 to 35 percent by 2035.
“Global oil demand, as alternatives come online and as efficiency gains are realized, is expected to flatten, peak and decline, though it’s not a disruptive [steep] decline,” said Clint Follette, a managing director at Boston Consulting.
Enbridge doesn’t foresee a decline, at least in the next 20 years or so.
In a PUC filing, the company says that even if electric vehicles capture 75 percent of the North American auto market by 2035, its Minnesota pipeline corridor would still be operating at full capacity.
Canadian oil producers are coping with a bottleneck that goes beyond Enbridge because of a lack of pipeline capacity coming out of Canada, oil industry analysts say.
“They are getting a much lower value for their crude,” said John Coleman, a senior analyst with energy consultancy Wood Mackenzie. (Conversely, the Canadian discount helps U.S. refiners like Flint Hills, since they’re buyers).
Oil analysts expect that Enbridge’s new Line 3 will be the first of three proposed Canadian oil pipelines to come online to help alleviate the capacity shortage. However, like Line 3, the two other big oil pipelines have also faced considerable opposition.
Even with capacity upgrades, Canadian oil has another problem.