North America Pipelines News
South Dakota Sits at Crude Oil Crossroads
by AFX News Limited
October 23, 2007
As oil hovers around $90 a barrel, the race is on
to more heavily tap into the world's second-largest oil reserve, and South
Dakota -- a major ethanol producer that typically sits on the alternative side
of the fuel industry -- is finding itself at the crossroads of two major oil
One is a 590,000-barrel-a-day pipeline with plans to deliver Canadian crude
to Patoka, Ill. and Cushing, Okla. The other is a proposed refinery that would
be the first new U.S. refinery location in more than 25 years.
Supply for both projects would come from the Alberta oil sands of northern
Canada, home to some 175 billion barrels of crude putting the region second only
to Saudi Arabia in terms of the world's oil reserves.
U.S. refiners are converting their plants to handle thicker Canadian crude,
and pipeline specialists such as Calgary-based TransCanada Corp. are looking to
connect supply with demand.
TransCanada plans to begin construction this spring on the Keystone
pipeline, a 2,148-mile route passing through the Dakotas, Nebraska, Kansas and
Robert Jones, a TransCanada vice president and director of the Keystone
project, said transporting crude oil by rail or trucks is less environmentally
friendly than moving it underground. New pipelines are critical infrastructure
if North America is to achieve greater energy independence, he said.
"The U.S. refiners have to do something to respond to increasing energy
demands in the U.S.," Jones said. "So their choices are import more oil offshore
from foreign sources or look to Canada and have a reliable source of crude oil
to supply the refineries."
Jones said TransCanada already has firm long-term compacts on nearly 500,000
of the 590,000 barrels that will be transported along the route each day.
That means passage along Keystone is nearly booked, and the line won't be
able to supply South Dakota's other potential oil project -- the Hyperion Energy
Privately held Hyperion Resources of Dallas wants to build a
400,000-barrel-per-day oil refinery in either Elk Point -- which sits less than
50 miles from the planned Keystone route -- or another undisclosed Midwest
The refinery would be built to handle Canadian crude, and the most obvious
way to get it to a refinery is by pipeline, J.L. "Corky" Frank, a Hyperion
project executive, told The Associated Press.
"Our 400,000 barrels a day that we'd require for our refinery would probably
be more than enough to justify a separate line, in and of itself, to serve this
refinery as well as any other potential customers that were on that line," he
Frank said the U.S. needs more refining capacity, and building refineries
inland to shield them from weather-related catastrophes such as hurricanes makes
sense. The Hyperion Energy Center would produce ultra-low sulfur gasoline and
diesel and be one of the most environmentally friendly in the world, he said.
Its price tag has been estimated at between $8 billion and $10 billion, but
Frank said the industry is changing daily, so the final cost could be more or
Frank said Hyperion is open to partnering with pipeline companies, producers
and equity firms, but the company has yet to select a final site for the
refinery and is keeping its options open.
"First thing you have to do before anybody wants to talk seriously about
doing something is to have a site," Frank said.
Throughout North America, companies are courting corporate partners to
better tap into Canada's valuable resource.
TransCanada and Houston-based ConocoPhillips Co. signed an agreement in 2005
to use the Keystone pipeline to deliver crude to ConocoPhillips' Wood River,
Ill. and Borger, Texas refineries, which are being expanded. The deal gives
ConocoPhillips the right to up to a 50 percent ownership stake in the pipeline.
In January, ConocoPhillips signed an agreement with EnCana Corp., a
Calgary-based company specializing in recovery of oil sands bitumen -- the
thick, gooey crude that's found in that part of the world.
The deal gives EnCana a 50-percent stake in ConocoPhillips' Wood River and
Borger refineries in the U.S. in exchange for a 50-percent stake in EnCana's
Foster Creek and Christina Lake oil sands properties in northeast Alberta.
Encana spokesman Alan Boras said it's a win-win for both companies.
"For us, we got access to the capacity to turn heavy oil into gasoline and
diesel that goes to the market," Boras said. "And for ConocoPhillips, it got
access to additional reserves so that its refineries can run efficiently and
have a secure supply of oil."
Boras said the partnership removes some of the market's price volatility.
Canadian oil recovery companies typically get 20 to 30 percent less for
their oil compared to lighter crude, and that differential can climb as high as
50 percent when supply exceeds demand.
With a 50-50 partnership, the upstream partner makes more money when the
crude is selling for more, and the downstream partner reaps the benefits when
the price is cheaper.
"So it integrated the business, and as a result you protected yourself or
removed that risk of the volatility of price, both on each side of the
equation," he said.
The transition from foreign oil to Canadian crude was highlighted in 2006,
when two pipelines typically used to move oil from the Gulf Coast area to
northern Midwest points were reversed.
ExxonMobil reversed one of its oil pipelines so it could bring Canadian oil
already running to Patoka, Ill. down to Texas.
And Enbridge Inc., a major Canadian pipeline company, reversed its Spearhead
Pipeline so oil could flow from Chicago to a major industry hub in Cushing,
Okla., said Denise Hamsher, Enbridge's director of public and regulatory affairs
in the U.S.
"The economics being what they are, that secure supply is growing," Hamsher
Enbridge has several other major expansion projects in the works.
One would expand its existing pipeline system, including pump station
modifications in Alberta, Saskatchewan and Manitoba and new pipeline in
Wisconsin and Illinois, to increase crude oil capacity to Midwest refineries and
Another, called the Alberta Clipper, would construct a new crude oil
pipeline from Alberta to Superior, Wis., to initially increase capacity to
450,000 barrels per day with potential growth to 800,000 barrels per day.
An additional pipeline running in the opposite direction along the same
route would transport diluents -- light hydrocarbons used to thin Canadian crude
so it can move through a pipeline -- up to Alberta.
Enbridge is teaming with ExxonMobil to assess the development of a new
pipeline project to transport crude from Patoka, Ill. to the Texas cities of
Beaumont and Houston.
Other oil companies are also making moves in the industry:
-- Houston-based energy company Marathon Oil Corp. is acquiring Western Oil
Sands Inc. for $5.5 billion in a deal that would give the nation's fifth-largest
refiner a 20-percent stake in the Athabasca Oil Sands Project. Shell Canada Ltd.
and Chevron Canada Ltd. hold the remaining 60 percent and 20 percent stakes,
respectively. Marathon stands to tap a net production of about 31,000 barrels of
bitumen per day, increasing to more than 130,000 barrels per day by 2020.
-- BP, which owns and operates a 600-mile long crude pipeline that moves oil
from Oklahoma to Chicago, wants to reverse the line's flow if it can solicit
enough long-term transport agreements. If demand warrants, the Viridian Pipeline
could begin running north-south by the fourth quarter of 2009 with an immediate
capacity of 100,000 barrels per day and potential for another 100,000 barrels,
the company says.
AP researcher Rhonda Shafner in New York contributed to this report.
Copyright 2007 AFX News Limited. All Rights Reserved.