Enbridge pipeline shutdown hits producers

Calgary — The Globe and Mail

The Enbridge pipeline that ruptured and spilled oil into a river July 26, 2010, in Marshall, Mich. (HO/REUTERS)

The shutdown of a key U.S. Enbridge pipeline is exacting a mounting toll across the North American oil industry, pinching profits, putting thousands of jobs at risk and threatening gasoline shortages.

Enbridge has closed off Line 6B, a pipe with 190,000 barrels of capacity, since a late July rupture sent 19,500 barrels of crude leaking into Michigan's Kalamazoo River. In so doing, it has shut off an important sales valve for Western Canadian crude and triggered an escalating set of problems.

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Not only has the Alberta oil patch been forced to juggle barrels through a limited network of jammed pipe, it is now also contending with prices that have dropped substantially, eroding profitability across a broad swath of the industry.

The pain has been felt all the way from Fort McMurray to a small refinery in Warren, Pa., where United Refining Co. runs a 70,000-barrel-a-day refinery that is now at risk of shutting down. United relies on the heavy oil flowing through Line 6B for 60 per cent of what it refines and sells at a network of nearly 400 retail stations across Pennsylvania, New York and Ohio.

Without that flow, United has already been forced to slash refinery output by 40 per cent and barter for barrels with companies that have crude coming in via a separate Enbridge pipe, Line 5, that brings lighter crudes to Ontario via a route north of the Great Lakes. The National Energy Board also recently made an allowance for the company to accept shipments from another pipe, Line 9, that transports imported crude to Southern Ontario from Montreal.

But it hasn't been enough. It will likely take more than a month to take delivery from an offshore oil tanker, and if the company can't source supply swiftly, the refinery will be forced to shut down at the end of the month, said United's Fred Martin, vice-president of supply and refining.

"We're at minimum rate right now. I can't cut any further. Every day I don't bring in what I'm running, I have to tear down inventory. And sooner or later, that's a game that has an end to it," Mr. Martin said.

"It's a challenge to our company."

That could jeopardize the jobs of United's 4,000 employees, strain asphalt supplies in cities like Buffalo, Syracuse and Pittsburgh, and create gasoline shortages in a third of Pennsylvania and a quarter of New York.

Mr. Martin noted bitterly that the workers at risk far outnumber the 42 muskrats, Canada geese and other species killed by the spill.

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The risk for other parts of industry lies primarily in falling prices for heavy Canadian crude, which is sold at a discount, or differential, to light sweet crude. Since Line 6B was shut down on July 26, the differential has spiked from $16.85 (U.S.) a barrel to $21.30 as transportation options are constrained. That shaves $4.45 from each barrel sold at current prices, creating a substantial profit hit to a large number of oil producers.

Although representatives for Suncor Energy Inc. and Imperial Oil Ltd. said their operations have not felt a substantial impact, output has been trimmed at a refinery owned by Husky Energy Inc. and BP PLC, while bitumen shipments from Nexen Inc. have been partly curtailed because of the logjam of crude exiting the country.

A Talisman spokeswoman said the company is considering either storing some of its crude or shipping it to different destinations. Enerplus Resources Fund has considered trucking some of its oil, as it starts to "see some crude back up in the system," said Jo-Anne Caza, vice-president of corporate and investor relations.

According to industry sources, Enbridge has also trimmed the amount of crude flowing through Line 5, further hampering the flow of oil to Ontario users. As a result, refineries in Eastern Canada are importing new supplies through Atlantic ports, while Alberta producers are sending some deep into the U.S. South, where there are buyers, but where the price hit can be as high as $10 a barrel. Many are also holding off, hoping prices revive once the pipe is fixed; Enbridge said Thursday that storage levels at its terminals are high.

Yet even though its still-operating lines are "very much at capacity," Steve Wuori, Enbridge's executive vice-president of liquids pipelines, said Thursday that the company has not yet enforced "apportionment," or quotas that restrict how much companies can ship.

Industry sources, however, say the risk of apportionment remains high, especially since Enbridge has declined to detail when it will resume shipping through Line 6B. Workers finished welding a repair on Thursday, but the company must still run several safety tests and receive regulatory approval, which it will apply for Friday, to restart operations.

And even when that happens, the line will start with what Mr. Wuori called "significant" flow rate restrictions, until Enbridge can determine that everything is safe.

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Enbridge Inc.
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