New Frontiers: the Great Lakes option for getting Canadian oil to market

There’s no shortage of ideas on getting the North American crude surplus to markets. One refiner recently floated — no pun intended — a new one: more transportation via the Great Lakes. In this week’s Oilgram News column “New Frontiers,” Bridget Hunsucker discusses the very early-stage proposal.

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Calumet Specialty Products Partners would venture into new waters with the construction of a crude oil loading dock on the Great Lakes. But, it may be rough seas ahead for the potential project that would connect heavy Canadian and light sweet Bakken crudes with a million barrels of local refining capacity.

The crude loading dock would be the first of its kind in recent history, said the company. Calumet is assessing the viability of the project which would be fully operational in 2015.

Among the obstacles for moving crude by ship in the Great Lakes region are vying regional crude pipelines and a US-flagged vessel shortage, sources say. A Jones Act (US-flagged) vessel is needed to ship from one US port to another.

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Crude shipped from the dock located on Lake Superior in Wisconsin would compete with the same crudes shipped via Enbridge’s Mainline System, sources say.

Enbridge Pipelines said earlier this month that it plans to increase the capacity for its Mainline Enhancement Project to meet shipping demand for heavy Canadian and Bakken crude in 2015. The Canadian Mainline System segment of Line 67 from Hardisty, Alberta will be expanded to the US border by 230,000 b/d, to 680,000 b/d in 2015.

The line’s expansion is part of the Mainline Enhancement Project which is designed to expand access to refinery markets in the US Midwest and beyond for growing production from western Canada.

“Most all of the refineries located on the Great Lakes are also located on Enbridge lines, so I don’t know what kind of advantage there would be to transship by lake barge or tanker, other than to provide optionality,” Tudor Pickering Analyst John Auers said. “Going all the way out to tidewater via the St. Lawrence [Seaway] might work, and this would provide access to the Atlantic refineries.”

The dock may support ships with a capacity of up to 120,000 barrels — the size of a large barge or small tanker — and would be built near the company’s 45,000 b/d refinery in Superior. The crude oil would first be sent by a common carrier pipeline to the refinery. From there, the oil would be sent by another pipeline to the dock, Calumet’s spokesman Todd Borgmann said.

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Moving in a west to east pattern, the dock-loaded crude would take a trip by many potential refineries located along the Lakes:

Starting in Wisconsin, the crude could travel to Lake Michigan to access BP’s 405,000 b/d Whiting, Indiana, refinery, and from there sail across the Chicago locks to ExxonMobil’s 238,000 b/d Joliet, Illinois or to Citgo Petroleum’s 167,000 b/d refinery in Lemont, Illinois, Andy Lipow of Lipow Oil Associates said.

From Illinois, the crude could continue to Detroit, home to Marathon’s 114,000 b/d refinery, and then move to the Sarnia, Ontario refining market, he said.

Finally, a crude-carrying vessel navigating the Great Lakes could travel to Montreal and Quebec refineries via the St. Lawrence Seaway, Lipow said.

The barrels could also find their way to the US Gulf Coast through the Illinois Waterway, President of Nagistics Consulting David St. Armand said.

“I don’t expect a trip all the way to the Gulf would be economical, but never say never,” Borgmann said, adding that the vessels would ship to “either US or Canada plants.”

But, even with the right ship and good demand, one hurdle still stands in the way of an Atlantic Ocean crude cruise—the narrow Welland Canal.

The canal runs from Port Weller, Ontario, on Lake Ontario to Port Colborne, Ontario, on Lake Eerie, and enables ships to bypass Niagra Falls.

“What that suggests is that you wouldn’t be able to get through that easily to Lake Ontario and Lake Eerie,” EnSys Energy President Martin Tallet said. “It restricts tankers from getting through.”

Shipping movements from the dock would likely be “ancillary movements that could be employed when the economics are right,” Tallet said.

In November 2011, Tallet foreshadowed the play in a presentation at the New York Energy Forum. He mentioned the potential for building a pipeline from the Canadian oil sands to a Canadian port on Lake Superior for access to markets via tanker on or near the Great Lakes.

“We looked at this movement and presented it more on the context of the situation of a longer term constraint on pipeline development,” Tullet this week said. “Given that you have projects underway to expand the lines to likely destination refineries [the dock’s logic] might fall into question.”

Still, the dock would provide growing Canadian crude production with a waterborne solution, First Energy Capital Analyst Steve Paget said.

“Maybe [Calumet] is making the argument that having the option to get crude deliveries that way would add value,” Paget said adding that three years ago players wouldn’t have considered crude by rail an option.

“Could crude by ship be the next crude by rail,” Paget pondered. “We don’t know, but [Calumet is] making a case for it.”

–Bridget Hunsucker in Houston


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Comments

  1. Chris at February 15, 2013 12:16 pm

    I think the potential for environmental catastrophe is being blown off too much these days, but the potential long-term damage to one of the most treasured natural wonders on the planet (Lake Superior) is too much. No amount of profit would be worth the potential danger to a lake that takes 200 years to flush itself.

     

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