Oil companies are shutting down wells and facing major increases in transportation costs as they load crude on trucks to work around a major spill that has stirred health concerns in a small Alberta community and closed the northern stretches of an important pipeline.
The province's energy regulator is warning that it will not authorize a restart of the Rainbow pipeline, which sprang another substantial leak five years ago, until it is satisfied the line is not plagued with systemic problems.
The 220,000 barrel-a-day Rainbow line is owned by a Canadian subsidiary of Houston-based Plains All American Pipeline L.P. Last Friday, it developed a leak that spilled 28,000 barrels into the forest and muskeg of northern Alberta. It's the biggest spill in the province since 1975, and substantially larger than the Enbridge Inc. leak in Michigan last summer that has cost that company $550-million (U.S.).
Apart from operational impacts, the spill has stirred new questions about the safety of North America's aging pipeline network, which has experienced a series of high-profile spills in the last year. Recent weeks have seen a small leak on the Kinder Morgan Trans Mountain line and a separate Alberta gas line leak that killed a maintenance worker.
Crews have been working around the clock to clean up the Rainbow spill, which the Alberta Energy Resources Conservation Board said is contained. The line runs 770 kilometres, from Zama, Alta., to Edmonton.
But leaders of the 300-member Cree community of Little Buffalo, about 30 km from the spill, say people have fallen ill from the smell and fumes of crude, and that some leaked material is being held back by a beaver dam, which has given rise to worry about the potential for greater environmental damage.
The ERCB said it will take a cautious approach to authorizing the pipeline's reopening. "Our staff have to determine if it's a one-time thing that happened there or if it's evidence of a systemic problem with the line," spokesman Davis Sheremata said. "Until they're convinced that it's not, they are not going to give the okay to restart operations."
That has created uncertainty and hurt output among companies that rely on the line, because they have almost no pipe alternatives to transport crude out of a series of important light-oil plays in northern Alberta and the Northwest Territories.
The number of affected companies is long, and includes Imperial Oil Ltd., Husky Energy Inc., Penn West, Royal Dutch Shell PLC, Baytex Energy and Pinecrest Energy. However, some of them ship only small amounts on Rainbow. Forest Oil Corp. and Harvest Operations Corp. are also believed to use the line.
On Wednesday, Husky said that it has "reduced upstream production from the region along this pipeline." Husky, like other companies scrambling for workarounds, is now trucking crude to different pipelines. Such a strategy is not cheap. Where it might cost $1 (Canadian) or $2 a barrel to ship on Rainbow, a trucked barrel runs $7 to $9.
"Having said that, oil is north of $100 (U.S.). So realistically, although it sounds like a lot in comparison to what your normal transportation charges are, you're stupid not to truck it," said Jason Fleury, senior manager of investor relations with Penn West. "Because corporately, typically that result on the quarter is a few pennies per barrel of oil equivalent."
Trucking, however, creates problems beyond cost. When storage fill up, companies must shut down wells until the next truck comes by to empty the tanks.
"We've had some wells shut in for parts of the day," said Wade Becker, the chief executive officer of Pinecrest, which relies on Rainbow for all but 300 of its 2,400 barrels of daily production. But, he said, "it's not prolonged."
The greater concern for companies is what this spill will do to an industry already struggling with public opinion, which is increasingly turning against pipelines. Two major new projects - TransCanada's Keystone XL and Enbridge's Northern Gateway - have been subjected to intense criticism, and leaks have made it difficult for opponents to believe company assurances that they will be built safely. That, in turn, has created uncertainty about whether the projects will receive government approval.
The leak from Rainbow, which was built in 1966, has renewed questions about the safety of North America's aging pipeline network. In Alberta, 40 per cent of pipe was built before 1990. In the U.S., 41 per cent of crude pipe was built in the 1950s and 1960s; another 15 per cent before then.
Rainbow has experienced problems commonly associated with age. A 2006 leak of 7,500 barrels was blamed on stress corrosion cracking, fatigue cracking and external coating failure.
Industry representatives, however, say it's wrong to blame age for problems. "With in-line inspection and appropriate maintenance, there's nothing that suggests that it automatically is a factor," said Brenda Kenny, president of the Canadian Energy Pipelines Association.
The ERCB also cautioned against pointing to age. The Rainbow pipe break "looks like a small crack running around at least half of the pipeline," Mr. Sheremata said. Three causes are likely: The company could have been running it with too much pressure; there may have been a problem with the protective coating that led to corrosion; or the land might have shifted.
"The land could heave or move in a way that could rupture the pipeline," he said. "That sometimes happens in springtime."