Oil producers eye Arctic backup plan as pipelines face uncertain future
Oil producers worried about pipeline bottlenecks and the future of proposed pipelines to the U.S. Gulf Coast and Canada’s West Coast are taking a serious look at an Arctic backup — the Port of Churchill in northern Manitoba — to get their oil to tidal water.
Discussions are quietly underway between Calgary’s oil community, Canada’s only Arctic seaport, railway companies, and refiners on the East Coast and the Gulf Coast, as well as in Europe, to collect unrefined oil by rail from fields across Western Canada, get it to the port on the west coast of Hudson Bay and load it on Panamax-class tankers.
We think we can provide them with a competitive cost advantage to position [oil] to multiple destinations for a short period of time each year
“We think we can provide them with a competitive cost advantage to position [oil] to multiple destinations for a short period of time each year,” said Jeff McEachern, the Winnipeg-based executive director of Churchill Gateway Development Corp. who has been making frequent trips to Calgary during the past six months to fine-tune the strategy.
“We are in pretty close proximity to where the oil is being produced to get it to tidal water. It’s not a full solution, but it has an economic advantage to it and a producer is always looking for any economic advantage they can get.”
The deep-water port is motivated to make it work. It has been a major export point for Western Canadian grain since 1929, but it’s looking to diversify its customer base following this year’s dismantling of the Canadian Wheat Board, its dominant customer.
The strategy’s biggest challenges are the port’s limited capacity and a short ice-free season — from July until the end of October.
However, the port can ramp up quickly to ship oil by using infrastructure already in place to ship grain. Oil shippers can extend the export season by using icebreakers and taking advantage of changing weather patterns that are extending ice-free periods.
The option can ease pipeline bottlenecks that are depressing the prices of Canadian crudes and fits with producers’ desire to develop multiple markets.
A decision on whether to move forward is expected in January. The first oil shipment could be launched in mid-to-late July and the goal is to ship two million barrels during the 2013 ice-free season to test the model.
“Producers are looking for more optionality in how they transport their product to refineries, and [ease] congestion in pipelines or rail service,” Mr. McEachern said. “It’s being looked at seriously because of the increased production.”
The Churchill plan is one of many emerging in response to controversy engulfing proposed pipelines, such as the proposed Northern Gateway pipeline to the West Coast and the proposed Keystone XL pipeline to refineries in Texas.
Already, oil shipments by rail are soaring and other pipeline plans seen as less likely to stir environmental-movement backlash are moving forward, including the gas-to-oil conversion of TransCanada Corp.’s cross-country Mainline.
Ken Hughes, Alberta’s energy minister, said the Port of Churchill and other options are all worth exploring because they create alternatives for Canada’s growing oil production.
Study of the Churchill plan started last spring at the request of a Calgary-based producer and has progressed to a feasibility study involving several companies that produce oil from Alberta’s oil sands as well as from Saskatchewan and Manitoba’s tight oil fields.
Also involved are the Hudson Bay Railway, the 1,017-kilometre private railway that begins at The Pas, Man., and travels to Churchill, and its partner, Canadian National Railway Co.
The Hudson Bay Railway is owned by OmniTRAX Canada, Inc., a private Winnipeg-based company that also owns and operates the Port of Churchill.
In addition to assessing whether there is market support, the feasibility study will look at public reaction, the cost associated with building any new infrastructure and the cost of using ice breakers.
So far, the port has been heavily reliant on grain exports, with some activity related to shipping freight to the communities of Nunavut. With the CWB’s privatization, the port has been worried about losing traffic and the federal government has provided an incentives to promote grain shipments for the next five years.
OmniTRAX Canada president Brad Chase said oil is rapidly shifting from pipelines to rail transportation, and the Hudson Bay Railway and the Port of Churchill can adapt to ship crude, another commodity.
“We currently have all the capabilities to do the same with diesel, which we do, and the light sweet unrefined oil has very similar properties, so there is not much for us to do to upgrade our current infrastructure to handle light sweet unrefined oil,” he said.
“We are quite excited about this,” he added. “There is genuine interest from a number of players, and our ideal scenario would be to have this up and running in support of producers and refiners for 2013.”
Best known for polar bears that move toward the shore in the fall, the town of Churchill’s 1,000 residents are generally supportive of the port’s diversification efforts, Mr. McEachern said.
But like Canada’s West Coast, the remote communities around Hudson Bay could be negatively impacted by an oil spill.
Mr. McEachern said the port already handles shipments of fuel to serve the region and takes safety seriously. Public engagement will ramp up if the option becomes “a real opportunity.”