oil

StarTribune: Central to Enbridge’s New MN Pipeline Request is How Much Oil is Needed

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.

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Learner Op-Ed in Duluth News Tribune on Falling Oil Prices and Controversial Pipelines

Regional View: Falling Oil Prices A Game Changer for Midwestern Pipelines

By Howard A. Learner

February 29, 2016

Bakken shale oil and Canadian oil sands market prices are low, and oil production is falling. Enbridge Energy Partners just announced it is further delaying construction of both the controversial proposed new Sandpiper oil pipeline and the Line 3 replacement oil pipeline for two more years until 2019. Enbridge blamed the Minnesota Court of Appeals’ decision requiring an Environmental Impact Statement process be completed.

However, that’s likely only part of the story.

Pipeline companies are biting the bullet and deferring new projects because of oil price and production uncertainties. Before Enbridge Energy and its partners spend $2.6 billion to $3 billion on each of the Sandpiper and Line 3 replacement oil pipelines through northern Minnesota, they might pause and see whether oil prices stay low and production declines. Markets matter.

The market price for benchmark West Texas Intermediate crude oil is low at around $33 per barrel, having fallen from the $100 per barrel range in 2011 through mid-2014. JP Morgan forecasts West Texas Intermediate crude oil to average $31.50 per barrel in 2016, and Goldman Sachs pro-jects $40 per barrel. Analyst projections for 2017 through 2018 vary considerably. Low oil prices mean fewer rigs, less oil production, and less need for new pipelines.

Bakken shale oil’s break-even prices are around $40 to $45 per barrel, well above the current market price. Production costs vary depending on how rich the particular oil well is, the efficiency of the company’s operations, financing costs, and how close the rig is to infrastructure. Bakken shale oil must be transported by pipeline or rail to distant Midwestern or Texas refineries.

The number of active drilling rigs in North Dakota is the lowest since July 2009. There are now only 38 active rigs in the Bakken area, down from 204 rigs in February 2012.

According to North Dakota Department of Mineral Resources Director Lynn Helms, Bakken output fell to 1.15 million barrels a day in December 2015, down 6 percent below the all-time high in December 2014. Helms stated that oil production could fall to 1 million barrels per day by late 2016. Oil production and service companies are planning more layoffs, and there could be additional bankruptcies in June 2016 when banks often recalculate their debt limits for oil companies.

Unless and until West Texas Intermediate oil prices reach around $45 per barrel, the rig count and oil production will continue to decline in the Bakken shale oil region, meaning less demand for oil pipelines such as Sandpiper and crude shipping by rail. For example, Whiting Petroleum just announced that it will suspend its Bakken shale oil drilling projects due to low oil prices.

Canadian oil sands’ break-even prices for new production are around $80 per barrel for the “best of the best,” $90 to $100 per barrel for the “rest of the best,” and $100-plus per barrel for the “rest of the rest.” Canadian oil production likely will stagnate until global oil prices reach at least $80 per barrel. Some existing oil sands production operations have enormous sunk costs and might continue to operate as a long-term play as producers wait and hope for higher oil prices.  However, expect production to decline and no new oil sands production to start.

Less oil production means less need for new pipelines. Financing for new North American oil pipelines is drying up until bankers and other investors see oil prices rise, leading to more production. That’s the market situation facing Enbridge for its costly new Sandpiper and Line 3 replacement oil pipelines.

Oil prices have dropped dramatically over the past 15 months. That changed reality has unavoidable market consequences for both oil production and the controversial pipelines.

Howard A. Learner of Chicago is executive director of the Environmental Law & Policy Center, an advocacy organization for environmental and economic development with offices in Chicago, Duluth and other Midwestern cities.

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Getting Real About Oil Prices and Impacts on Oil Pipelines

Bakken shale oil and Canadian oil production is falling, and pipeline companies are now biting the bullet and deferring projects. Here’s an update on oil prices, Bakken shale oil, Canadian tar sands, and the impacts on oil pipelines in the Midwest. Markets matter.

Today, the Nymex market price for West Texas Intermediate (WTI) crude oil is $29.57/bbl. That’s low, and many analysts believe that WTI oil prices will stay below $50 bbl, or go even lower, during the next two years.

Bakken Shale Oil – Fewer Rigs, Less Production, Weakened by Today’s Market Prices: North Dakota’s Bakken shale oil’s break-even prices are WTI $45-$50/bbl for the most efficient producers and WTI $50-$60/bbl for the rest of the producers. That depends on how rich the well is, how costly and efficient the company’s construction and operations are, and how close the rig is to infrastructure. Then, the Bakken shale oil must be transported by pipeline or rail to distant refineries in the Midwest or Texas.

The number of drilling rigs now operating in North Dakota is the lowest since July 2009, and, as production ends at some existing rigs, the rig count will likely decline further. According to the North Dakota Department of Mineral Resources, Bakken output fell to 1.15 million barrels a day in December, down 2.5 percent from the previous month and 6 percent below the all-time high in December 2014. Department of Mineral Resources Director Lynn D. Helms stated that oil production could fall to 1 million barrels a day by the end of 2016. According to Helms, oil production and service companies are planning more layoffs in the first half of 2016, and there could be additional bankruptcies in June 2016 when banks often recalculate their debt limits for oil companies.

Unless and until WTI oil prices reach $50/bbl, the rig count and production will continue to decline in Western North Dakota’s Bakken shale oil region.

Canadian Oil Sands – New Production Not Economical with Today’s Market Prices: Canadian tar sands’ break-even prices for new production are around WTI $80/bbl for the “best of the best,” WTI $90-$100/bbl for the “rest of the best,” and WTI $100+/bbl for the “rest of the rest.” Canadian oil production will stagnate until WTI oil prices reach at least $80/bbl. Some current oil sands drilling and production operations have enormous sunk costs and will continue to operate as a long-term play as producers wait out what they hope will be higher prices in 2-3 years.

Less Oil Production Means Less Need for New Pipelines: Financing for new North American oil pipelines is drying up until bankers and other investors see WTI prices rise and thereby lead to more oil production. For example, Enbridge Energy Partners just announced that its Sandpiper Pipeline Project (running from Bakken shale in Western North Dakota through Grand Forks and Northern Minnesota to the oil refinery in Superior, Wisc.) and the Line 3 Replacement Program (running from Alberta through Eastern North Dakota and Minnesota to the oil refinery in Superior, Wisc.), which were originally scheduled for completion by 2017 and 2018, respectively, will both be held back as construction delays “cause a shift in the in-service dates to early 2019 and increase costs for the [Line 3 Replacement] and Sandpiper projects.”

That’s the market situation. As vehicle fuel efficiency (mpg) for North American cars and trucks continues to improve, that will reduce demand for gasoline, as will longer-term trends of Millennials driving less. We’ll see if low gas pump prices, on the other hand, continue and result in more vehicle miles travelled.

Please let me know if you have any questions or suggestions. Oil prices and markets have changed dramatically in the past 15 months, and the consequences for oil pipelines are significant.

MLive: Why Michigan won’t shut down Mackinac straits oil pipeline

STRAITS OF MACKINAC — Shepler’s Mackinac Island Ferry service boats run on oil and they’ve done so for more than 70 years. But they won’t run at all if tourism dries up because the island is engulfed in an oil spill.

That risk has led Chris Shepler, owner of the popular ferry business, to publicly call for a shutdown, or decommissioning, of the Enbridge Inc. twin Line 5 oil pipelines that traverse the straits’ bottom just west of the Mackinac Bridge.

“We’ve got to err on the side of caution,” said Shepler. “Nothing lasts forever.”

That shutdown argument is gaining steam. Calls for either decommissioning, replacing or regulating the controversial Line 5 pipeline segment under the straits have grown more frequent since environmental groups began raising fears a few years ago about an ecological and economic disaster if the 62-year-old line were to a rupture oil into Lake Michigan and Lake Huron.

Legislators have aimed bills at the pipeline. Mayors have written the governor. Freshwater advocates have coalesced around the issue and activists have staged protests and disruptions. The latest occurred last week in Lansing, where a group gathered on the Capitol steps to call for an immediate shutdown of the pipeline, which they consider an unacceptable threat to the Great Lakes.

But state officials recently stopped short of recommending it be shuttered after a yearlong inquiry in a report issued July 14, even though Michigan Attorney General Bill Schuette, who co-chaired the effort, said Line 5’s “days are numbered” and the state would probably not allow its construction were that approval sought today.

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North Dakota Forum editorial supports conservation from inappropriate development

The North Dakota Forum, the state’s largest-circulation newspaper, published a May 13th editorial calling for stronger protections of the state’s culturally important places from oil, gas and other potentially damaging development. The editorial sites the North Dakota Industrial Commission’s good efforts to protect sensitive habitat, cultural values, water and landscapes from inappropriate development. Read the editorial.

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