What Becomes of the Empty Pipelines? TransCanada’s Mainline Conversion to Oil

The TransCanada Energy East project proposes converting 1865 miles of the natural gas Mainline system and constructing 870 miles of new pipeline to deliver at least 500 Mb/d of crude oil to eastern Canada from Alberta. The pipeline conversion could solve two problems. It would bump up tariff revenues on the huge 7 Bcf/d Mainline that has been sucking air for years (it only moved 2.4 Bcf/d in 2012). And it would provide a route to Eastern markets for rising production volumes of landlocked Canadian crude. Today in the first of a two part series we examine prospects for this project.

A couple of weeks back we wrote about the Kinder Morgan Freedom Pipeline proposal to convert part of the El Paso natural gas pipeline in West Texas to carry oil from the Permian Basin to California (see Is the Price of Freedom Too High?). Since that time it would appear from their public comments that major refiners in California are not supportive of the Freedom pipeline plan. Refiners seem to prefer the flexibility that crude by rail offers them to deliver crude from North Dakota and Western Canada and are proceeding with plans to build rail unloading terminals in California. In an earlier blog this year we reviewed the costs of converting a pipeline from natural gas to oil (see One Way or Another). This time we take a look at the Energy East project proposal by TransCanada to convert part of its Mainline natural gas pipeline to carry oil from Western Canada to the East Coast.

TransCanada owns and operates the huge Mainline, which is a high-pressure natural gas transmission system that extends from Empress, Alberta (near the Saskatchewan border) across Saskatchewan, Manitoba, and Ontario and through a portion of Québec, and connects to various downstream Canadian and international pipelines (see green line on the map below). The Mainline integrated system can transport as much as 7.0 Bcf/d of natural gas from Western Canada to markets in eastern Canada and the US northeast and Midwest. The Mainline currently consists of five parallel gas lines stretching 8,763 miles from the Alberta-Saskatchewan border east to the Quebec-Vermont border. Natural gas volumes transported on the pipeline have declined significantly in recent years. The annual average volume of receipts into the pipeline at Empress, Alberta, and in the province of Saskatchewan has plunged from a high of 6.8 Bcf/d in 2000 to just 2.4 Bcf/d in 2012.

Source: TransCanada Tariff Submission to National Energy Board (Click to Enlarge)

Declining gas volumes on the Mainline out of western Canada largely result from three fundamental trends over the past few years. The first is a decline in conventional natural gas production in Western Canada due to less drilling and lower gas prices. The second is an increase in local demand for that declining production for use in enhanced recovery of heavy oil from oil sands in Western Canada. The third and ultimately most significant trend is the rise of shale production in the northeast US from the Marcellus and Utica fields. We have documented how increased Marcellus production has pushed out Canadian imports into the US (see Canadian Gas Flows Reverse at Niagara) and begun to replace mainline volumes from Western Canada in Ontario and points further east (see The Battle for a New Dawn and The Constitution Amendment to Iroquois Gas Supplies). [We should note that unconventional shale gas production is increasing in Western Canada but because of the transportation distance to eastern Canadian markets these supplies cannot easily compete with the Marcellus and as a result Canadian shale producers are looking to export their production as LNG from the West Coast (see Lonely Gas Surplus Seeks Long Term Overseas Relationship).]  Because of these three fundamental trends, Mainline capacity is more than half empty and shippers are increasingly using the pipeline for short haul movements in the eastern region rather than for long haul shipments of gas from the west. TransCanada recently applied to the National Energy Board (NEB) and received approval for some but not the entire tariff change that they requested to cut the cost of long haul shipments on the Mainline.

Given that TransCanada has available capacity on the Mainline the company has solicited interest from shippers to convert part of the pipeline to oil. The company launched an Open Season on April 15, 2013, to obtain binding commitments from interested parties for the Energy East Pipeline system, which would transport crude oil from receipt points in Western Canada to delivery points in Montréal, Québec City, and Saint John, N.B. (see map below).

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