CALGARY – Oil will start flowing from Oklahoma to the Gulf Coast this weekend through a reversed Seaway pipeline but it’s not expected to do much to ease a supply glut that has eroded the profits of Canadian and U.S. crude producers.
“Our view with respect to the reversal of the Seaway pipeline is simply it is not going to be enough pipeline capacity to alleviate the bottlenecks,” Randy Ollenberger, an analyst with BMO Capital Markets told reporters Friday.
Calgary-based Enbridge Inc. (TSX:ENB) and its U.S. partner Enterprise Products Partners LP have started to bring the modified Seaway pipeline into service.
The line formerly carried crude northward from the Gulf Coast, where the oil was unloaded from tankers. But burgeoning production from the Alberta oilsands and U.S. oil fields has been pouring into the storage hub of Cushing, Okla.
The supply glut has caused oil priced at Cushing – the WTI benchmark – to trade at a steep discount to international crudes, like Brent from the North Sea.
By reversing the direction of flow, the Seaway pipeline can drain some of the Cushing supply to refineries along the U.S. Gulf Coast that are thirsty for new sources of oil to supplant imports from Mexico and Venezuela.
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With an initial capacity of 150,000 barrels per day, the Seaway reversal won’t put much of a dent in the pipeline capacity that is needed to accommodate U.S. production.
Production from the Eagle Ford shale in Texas is now at 600,000 barrels per day, and output from the Bakken region of North Dakota and Montana is approaching the same rate, said Ollenberger.
It’s even tougher for Canadian producers whose crude already trades at a lower price than already-discounted WTI.
“The simple matter is oil production is simply too high coming out of these various markets to be absorbed by one single pipeline of 150,000 barrels a day,” said Ollenberger.
“The answer is really multiple pipelines, and help is on the way.”
Early next year, Seaway’s capacity will increase to 400,000 barrels per day by adding more pumping power. Then, by mid-2014, Enbridge and Enterprise plan to twin the pipeline to more than double capacity to 850,000 barrels per day.
Rival TransCanada Corp. (TSX:TRP) is also pressing ahead with the southern portion of its Keystone XL pipeline, which was rejected in its entirety earlier this year by the Obama administration.
The portion from Cushing to the Texas coast, which is needed most urgently because of the Cushing glut, does not need a presidential sign-off because it doesn’t cross an international border. TransCanada sees that $2.3-billion project coming into service in mid-to-late 2013.
TransCanada decided to break up the project in two parts, tackling the Gulf Coast segment first and filing a new application to build the portion between the Canada-U.S. border at Montana and Steele City, Neb.
The are also various proposals to connect Canadian crude to the West Coast, so it can be exported to Asia, as well as proposals to ship crude to eastern refineries that currently rely on costlier imported Brent crude.
Ollenberger said he sees the WTI-Brent spread persisting above $10 per barrel until the Seaway pipeline is expanded next year, and then dropping to between $5 and $10.
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