Enbridge Inc. disclosed that it is open to working with the Bad River Band (a Wisconsin indigenous group) on the possibility of rerouting Line 5 that transverses a limited land area of concern for the Red River Band. The news of this flexibility on the part of Enbridge came after the Bad River Band filed a federal lawsuit against Enbridge. The owner of the pipeline, now in its 66 year of operation, is also involved in a recent suit filed by the state of Michigan that aims to permanently shut down the line that crosses beneath the Mackinac Straits rather than allow the operator’s replacement project proposed in a new deep tunnel far below the Strait’s lakebed.
Line 5 has a capacity of 540 Mbbl/d and transports petroleum liquids as part of the Mainline Pipeline System. We think as much as 20% of the capacity is utilized for mixed propane/butane NGL while the rest is light or medium conventional, unconventional or syncrude grades of crude oil all with API degrees above 25⁰. We believe any closure of Line 5 would mainly affect refineries East of Sarnia. The shutdown would force Canada’s easternmost refineries to source costlier crude by rail delivery from North America’s more westerly producing regions or it would force refiners to rely on piped, railed or tanked crude imports delivered to North America’s eastern seaboard. Any shutdown of Line 5 should not affect heavy crude runs at Sarnia or otherwise since Line 5 is not designed to carry that grade of crude oil.
That said, after any shutdown, we think the heavy crude runs in the upper Midwest US and in Ontario or east should either increase or at least remain flat. For light crude, we think the Michigan and Ohio refineries in the US and the Sarnia refineries in Canada should have sufficient alternate pipeline or rail access existing to rise to the challenge of any Line 5 shutdown period. That’s because we expect sufficiently-sized existing crude pipelines from the southwest could be called upon to bring in replacement volumes of light crude to refineries in Sarnia and the US Midwest via other pipelines.
We also believe that the closure of this pipeline would disturb NGL supply to Wisconsin and Michigan (more than half of Michigan’s propane demand is supplied by Line 5). We estimate during peak winter season months that about 20% or 108 Mbbl/d of the pipeline’s capacity is allocated to NGL transportation. According to available monthly data from the US EIA (which ends in the shoulder month of April 2019), PADD 2 imported just under 93 Mbbl/d of NGL. While other NGL logistics such as train and truck tankers represent a part of that imported supply, it seems Line 5 represents a significant share of PADD 2 NGL imports year-round. The closure of this pipeline would result in more propane deliveries via costlier surface logistics. Aside from impacting the propane supply into the region, a Line 5 shut in would foreseeably affect regional propane prices and regional demand.
LNG Terminal Delays Slow Exports, Build Storage: Freeport LNG has announced that Train 1 is ready to begin operations after several months of delays. The 0.6 Bcf/d capacity facility has introduced feed gas into Train 1 as part of the start-up process. Subsequent trains will start in January and May 2020.
Our Take: The first train at Freeport LNG makes it the fifth LNG terminal to be operational in the US. Startups at the other two trains are facing delays into mid-2020. We were also expecting Elba Island LNG by Kinder Morgan to start earlier this year along with many other US LNG plants. We still believe at least the initial first few of the 10 trains at Elba Island should start in the latter months of 2019. Amid these and other LNG plant delays, we have back-calculated that the extraordinary US record working gas storage inventory refill since March 31 coincides almost one for one with the Bcfs of LNG not exported. That is, the excess gas that was produced this year did not get exported offshore since slow LNG plant startups, causing a pernicious bottleneck. We continue to expect gas production to set new highs this year. But with delayed LNG startups still slowing exports into the back half of 2019 and early 2020, we think we could easily see a serious overhang of above-normal working gas inventories keep a lid on any gas prices at least until winter. We think, therefore, that US gas price expansion will require heavy summer power burns and early and robust heating-season consumption.
Point Breeze Section of PES Refinery to Permanently Shut Down: According to media reports, Philadelphia Energy Solutions (PES) is in the process of permanently shutting down its Point Breeze section (the only section currently operating) as it prepares to close the entire 335 Mbbl/d refinery and file for bankruptcy.
Our Take: We are witnessing the final days in the current operational life of the Philadelphia refinery. This latest demise and bankruptcy plan comes after an alkylation unit fire, which we have covered since its June occurrence. That fire and subsequent operational disruption at the PES refinery has destabilized petroleum products supply in the region. With the full closure of Point Breeze, we expect petroleum products shortfalls in the region will need to be made up by shipments from the Gulf Coast, Canada and Europe. Crude imports to this location will cease, and ample light crude in the US should help American refiners top up their distillation units humming to make fuel to send to the East Coast. Prices for petroleum products in the region have risen as a result of the local refinery outage and are unlikely to return to lower pre-outage levels. This shutdown in Philadelphia is clearly a potential outlet for any restarted production at the Limetree Bay refinery that seeks to restart by year-end 2019 in the US Virgin Islands. That plant had been operated by Hess and was a big importer in prior decades to the New York Harbor market. The USVI is also exempt from Jones Act requirements, which should put it at an advantage to capture the Philadelphia refined product markets vs. US Gulf Coast refiners, which must utilize costlier product tankers that comply with the Jones Act.
In its 2Q19 results, Tallgrass Energy LP (NYSE: TGE) disclosed that the 100 Mbbl/d Iron Horse pipeline was placed in service in 2Q19. The 80-mile 16-inch, pipeline is designed to transport crude oil from the growing Powder River Basin to Guernsey, Wyo.
The Iron Horse pipeline provides producers in the Powder River Basin region the takeaway capacity to support production growth. At Guernsey, this crude can be stored or transported in long-haul pipelines ̶ now in operation or under construction ̶ that take crude to the key market of Cushing or farther to the Gulf Coast. Greater Bakken takeaway should tighten Bakken discounts to WTI prices.
According to the latest data from the EIA, April’s Oklahoma crude oil production set a new record high of 617 Mbbl/d.
This is the second consecutive monthly record in the state. New pipeline takeaway capacity should come online out of the Scoop/Stack this quarter to boost capacity to 957 Mbbl/d. We believe that some of the existing production is being transported on though-going pipelines that deliver to Cushing from originations outside of the Scoop Stack. We expect the availability of takeaway capacity to promote production growth. Greater pipeline takeaway out of the Scoop/Stack region should raise netbacks closer to WTI Cushing prices.
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