CALGARY, Canada — Crude from Alberta's oil sands sells at a 30 percent discount to its U.S. counterpart. TransCanada Corp. Chief Executive Officer Russ Girling plans to narrow that gap whether or not his Keystone XL pipeline to the Gulf of Mexico wins approval from the Obama administration.
Canada's second-largest pipeline company proposes to pipe oil 3,000 miles across Canada to the Atlantic Coast, allowing producers to pick it up there and send it by tanker to the Gulf, Girling said in an interview. He expects U.S. passage of Keystone "very soon," but the East Coast route makes sense in any event because of rising production from Alberta, Girling said.
"It's not a Plan B. It's a Plan A, and it will go if the market supports it, along with Keystone," Girling said. "Once you get on tidewater, you can get anywhere, and you don't need a presidential permit to bring oil into the Gulf Coast."
TransCanada shares are trading near a record high in advance of an expected U.S. decision this year on the $5.3 billion cross-border segment of Keystone, which would link crude from the oil sands and North Dakota with Gulf Coast refineries.
"I suspect we're looking at anything from a few weeks to a couple of months" for approval, Girling said. The United States, which rejected the pipeline last year, is reviewing the project again after the route through Nebraska was changed to avoid the Sandhills and the Ogallala Aquifer. TransCanada first proposed the Keystone XL line in 2008.
Pipeline bottlenecks because of U.S. refinery downtime and increasing output have depressed prices of Canadian crude, which sold for 30 percent less than the U.S. benchmark in the fourth quarter, versus a 13 percent gap a year earlier. The discount makes Canadian crude the cheapest in the world and will cost Alberta about $6.02 billion this year in revenue, the provincial government has said.
Recently, however, refineries in the East, which have been stuck using higher-priced Brent crude imported on tanker ships, have figured out that they can get Canadian oil by rail much cheaper. That has led to a recent increase in the price of Canadian oil.
For Midwestern drivers, that explains the recent spike in gasoline prices.
Girling, 50, expects to decide near the end of March on a project to convert to oil part of the Calgary-based company's cross-Canada gas mainline and lay new pipe to the east coast by mid-2017. The eastern line, which would move as many as 900,000 barrels per day of western Canadian and U.S. crude to eastern refineries, "is economic," Girling said.
"Production from the oil sands and U.S. production sources is expected to grow a couple million barrels a day, which means that we need, as an industry, probably three Keystones to get that oil to market," Girling said. "If Keystone doesn't get approved, the oil will still get to the Gulf Coast."
TransCanada stock has advanced 17 percent in the past 12 months. The shares climbed to a record of C$49.32 at the close Jan. 28 as investors warmed to the company's growth projects and the yields of pipeline and utility companies in general, said Juan Plessis, an analyst at Canaccord Financial in Vancouver.
TransCanada's eastern conduit would help displace 600,000 barrels per day of oil imports in Canada, Girling said. Imports of crude are priced off the Brent contract, a British benchmark that currently costs almost double the western Canadian price.
The company has offered producers and refiners delivery points in New Brunswick and Quebec, where there are two refineries, Girling said. The conversion and additions to the mainline, which may be built in stages to Montreal and then Saint John, will cost more than the company's initial estimate of $5 billion because of projected rising costs by the time construction begins in 2015, he said.
"I'm very optimistic we will get the contractual support we will need, and what I would hope is the pipeline goes all the way to Saint John," Girling said.
The mainline project promises to lift prices of crude produced from Canada's oil sands, the third-largest source of recoverable oil reserves in the world. Oil sands output will rise to 3.2 million barrels per day by 2020, double 2011 figures, according to the Canadian Association of Petroleum Producers.
President Barack Obama denied TransCanada a permit needed to build the cross-border line last year, after Congress forced a quick decision during a review of the line's environmental effect in Nebraska. Landowners and political leaders in Nebraska raised concerns a spill would pollute the Sandhills or the aquifer that spans much of the state.
TransCanada split up the project to begin building the southern leg to Texas first and re-applied for approval of the northern portion after rerouting the line in Nebraska.
TransCanada's eastern line will become more important should environmental and aboriginal opposition derail other oil pipeline plans across British Columbia to Canada's Pacific coast, said Michael Formuziewich, who helps manage assets at Leon Frazer and Associates in Toronto, including TransCanada shares.
The Northern Gateway pipeline proposed to Kitimat, British Columbia, by Enbridge, Canada's largest pipeline company by market value, has been delayed until 2017 as opponents appear before Canadian regulatory hearings. Houston-based Kinder Morgan Energy Partners Inc. also is proposing to expand its existing Trans Mountain pipeline to Vancouver and faces similar opposition over potential spills from the pipeline and from oil tankers.
"If you look at the volume projection going out to 2020, you start saying Northern Gateway's not going to happen, Kinder Morgan's Trans Mountain will be delayed," Formuziewich said. "Then the TransCanada mainline conversion is necessary, it's a Plan B to the others."
TransCanada's eastern plans may run into opposition in Quebec, where environmentalists such as the advocacy group Equiterre are girding for a fight against the development of the oil sands, Canada's fastest-growing source of greenhouse gas emissions. The Parti Quebecois government of Premier Pauline Marois is studying the effects of a competing plan from Enbridge to move Alberta oil to Montreal.
The mainline project across Canada is an example of "panic and urgency" within the energy industry, said Steven Guilbeault, Equiterre's executive director.
"On some level, they're probably trying to hedge their bets," Guilbeault said. "If Quebec isn't the highest rate of opposition to the tar sands in Canada, it's certainly up there with B.C."