Energy Summary for Jan. 7, 2022
2022-01-07 19:06 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for February delivery lost 56 cents to $78.90 on the New York Merc, while Brent for March lost 24 cents to $81.75 (all figures in this para U.S.). Western Canadian Select traded at a discount of $12.14 to WTI, down from a discount of $12.12. Natural gas for February added 11 cents to $3.92. The TSX energy index added 1.58 points to close at 177.35.
Canadian oil producers ended the week on a cheerful note: The reversed Capline pipeline is now fully in service. This opens up a new route for Canadian crude to get to refineries on the U.S. Gulf Coast. Initial volumes on the pipeline are 100,000 barrels a day, with room to double this capacity to 200,000 barrels a day (and perhaps even more later on).
The reversal of this pipeline has been a long time coming. Capline, owned by Plains All American and Marathon Petroleum, stretches over 1,000 kilometres from Patoka, Ill., to St. James, La. It was commissioned in 1968 and historically took crude from the Louisiana Gulf Coast to refineries in the Midwest. As Gulf Coast refineries began showing higher demand for heavier crude from Canada, Plains and Marathon began to consider reversing the Capline, which would be able to connect to Canada through a different pipeline system (Enbridge Inc.'s (ENB: $51.28) Mainline network and Southern Access extension) and take northern crude to the Gulf Coast. Those musings started as far back as 2012. Long-term contracts made the idea impossible until after 2016. In 2017, Plains and Marathon committed to the reversal, and now, roughly five years later, the reversed line is in service.
As noted above, the line's current available capacity is 200,000 barrels a day. This is far cry from its maximum potential capacity of 1.2 million barrels a day, but getting to that level will take significant investments in reconfiguring pumping stations. "We definitely think there's opportunities to increase [capacity]," said Jeremy Goebel, chief commercial officer of Plains, in a conference call in November. He said the increases will depend on demand from shippers and refiners, the outcome of Enbridge's Mainline contract negotiations (which could extend into 2023), and other factors.
Even small amounts are expected to provide a boost to Canadian producers. Grant Fagerheim, president and chief executive officer of Whitecap Resources Inc. (WCP: $7.94), told the Financial Post last October that a reversed Capline will help "de-weight the entire pipeline system in Canada." He explained that producers will have more choice in whether to ship their crude to the Midwest or the Gulf Coast, thus providing "insurance." (He was referring to protection from past pricing blowouts that have occurred when Canadian producers were mainly restricted to U.S. buyers in the Midwest. When the Midwest saw a glut of supplies or a drop in demand, Canadian oil suffered large discounts -- sometimes as high as $40 (U.S.) a barrel -- to the main WTI benchmark. The reversed Capline should help smooth out the bumps.)
This is not the first time that a south-north pipeline has switched directions and ultimately benefited Canadian producers. In 2012, Enbridge and Enterprise Products Partners reversed their Seaway pipeline, which had been running from Texas to Oklahoma. Two years later, Enbridge's Flanagan South pipeline went into service from Illinois to Oklahoma, which along with Enbridge's Mainline and Lakehead systems opened up a route to the Gulf Coast for Canadians. One Canadian taking advantage of this route is oil sands player MEG Energy Corp. (MEG), down three cents to $12.84 on 2.47 million shares. In 2022, MEG expects to sell about two-thirds of production to the Gulf Coast.
Another oil sands producer, Suncor Energy Inc. (SU), lost 27 cents to $33.58 on 10.5 million shares. It too is in a celebratory mood this week, but the cause of its excitement lies in the east. "Bienvenido!" it cheered on Twitter. It explained that its floating production vessel (FPSO) for its Terra Nova oil field off the coast of Newfoundland has safely arrived at a dry dock in Spain, "where work is under way to extend the life of the vessel by another decade."
The news comes just four months after Suncor pulled the troubled Terra Nova back from the brink. Suncor is the operator and largest owner of the Terra Nova field, which has been a mainstay of the offshore Newfoundland oil industry since 2002. In 2019, Suncor halted production in order to send the FPSO to Spain for a badly needed refit. A global pandemic put a halt to this plan in 2020, forcing the FPSO to sit idle in a Newfoundland harbour. Rumours emerged that the six other owners were ready to walk away and decommission the field. After much uncertainty (and much hand-wringing by the Newfoundland government and the regional oil lobbying group), Suncor announced a rescue plan in September, 2021.
The rescue involved a large restructuring of the ownership of the field. Among other things, four of the seven owners left, with their interests divvied up among the remaining three, being Suncor, Cenovus Energy Inc. (CVE: $17.34) and the Texas-based Murphy Oil. These three agreed to a proposal to increase Terra Nova's productive life by at least 10 years.
They just need to get the FPSO fixed up first, hence Suncor's excitement that the vessel is now safely in Spain. If all goes well, the vessel will sail back and Terra Nova will once again be on production, for the first time in years, by the end of 2022.
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