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Marathon’s pipeline reversal would reduce need for Keystone XL

Donald Robicheaux, safety coordinator at Marathon Oil Corp.'s Garyville Refinery, right, speaks near the recently completed crude oil unit at the refinery in Garyville, Louisiana, U.S., on Thursday, March 25, 2010.

Patrick Semansky/Bloomberg

Marathon Petroleum Corp. is considering a potential reversal of a major U.S. pipeline that could dramatically boost exports of Alberta's heavy oil to the Louisiana Gulf Coast, as the energy industry moves beyond the long-delayed Keystone XL pipeline project.

Marathon, BP PLC and Plains All American LP are assessing "potential commercial opportunities" for their Capline pipeline system from Louisiana to the U.S. Midwest that could see the line repurposed to ship fast-growing production from North Dakota's shale patch and the Alberta oil sands to the eastern Gulf Coast region.

It's the latest sign that market players are moving past TransCanada Corp.'s $10-billion (U.S.) Keystone XL project, which has been sidelined for years by environmental opposition and U.S. politics.

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A reversed Capline would open a significant new route for Canadian oil to the key Gulf Coast processing hub, experts say, adding as much as 1.2-million barrels a day (b/d) of new transport capacity to a market already buoyed by increased crude-by-rail shipments and major additions along established pipeline corridors. Capline currently ships crude north about 1,020 kilometres from St. James, La., to Patoka, Ill. Keystone XL, by contrast, plans to ship 830,000 bpd.

"I think the refineries in Louisiana would be interested in accessing heavy Canadian crude through that means," said Afolabi Ogunnaike, a Houston-based analyst at energy consultancy Wood Mackenzie. "The challenge is, is there sufficient capacity to get the crude into Patoka?"

For years, Alberta's landlocked oil sands producers have grappled with price swings for the province's sticky oil, as fast-growing production backed up on cross-border pipelines.

With major export pipelines delayed, producers including Imperial Oil Ltd., Cenovus Energy Inc. and MEG Energy Corp. are using 100-car trainloads of crude to reach higher-priced markets including the Gulf Coast. Enbridge Inc. is also poised next month to open the valve on its 580,000-bpd Flanagan South pipeline from the Chicago area to the storage and energy futures hub at Cushing, Okla. From there, oil could be shipped to the Gulf Coast on the company's Seaway system.

The expanded export routes have contributed to reduced discounts for Western Canada select (WCS) heavy oil, analysts say, helping to offset the steep decline in world and U.S. crude prices to two-year lows.

On Monday, WCS for December delivery fetched $16 less than U.S. benchmark West Texas intermediate, according to broker Net Energy Inc. in Calgary. That compares with a differential of more than $40 at times early last year, a discount blamed for draining billions from government and corporate coffers.

Marathon, already a big buyer of Canadian crude, said it was assessing Capline's future "to address the expanding crude oil supply in North America and the significant changes in crude oil demand patterns." A study is expected to wrap up in the first quarter next year.

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The company is in the early stages of assessing the switch and no decisions have been made, Marathon president and chief executive officer Gary Heminger told analysts last week. He declined to speculate on timing and said the move required approval from all three partners.

"But if heavy crude from the Canadian region was available, there's substantial demand in the Louisiana refining corridor," he said. "Most of those refineries from Baton Rouge through Garyville and on are heavy refineries. So I think there could be a lot of volume that could go that direction some day."

Capline couldn't be reversed before 2016 because of existing supply contracts with a Valero Energy Corp. refinery in Memphis, Tenn., Mr. Ogunnaike of Wood Mackenzie said.

The consultancy on Monday said discounts on Canadian heavy oil would average between $18 and $25 through 2020, even as new pipelines and rail boost exports to the Gulf Coast tenfold to one million barrels daily.

"They need to get shippers," he said. "There's a whole process before you can reverse a pipeline."

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About the Author

Jeff Lewis is a reporter specializing in energy coverage for The Globe and Mail’s Report on Business, based in Calgary. Previously, he was a reporter with the Financial Post, writing news and features about Canada’s oil industry. His work has taken him to Norway and the Canadian Arctic. More

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