Is This The Beginning Of A New Oil Crisis In Canada?

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Authored by Nick Cunningham via OilPrice.com,

Canada is desperately trying to build the much-delayed Trans Mountain Expansion, but even as it tries to advance the ball on one front, another pipeline has found itself in the crosshairs.

Enbridge’s Line 5 pipeline carries more than a half a million barrels of oil and products per day from Alberta, across the border into the U.S., and ultimately to refineries back in Canada at the major refining and petrochemical hub of Sarnia, Ontario.

The 540,000-bpd pipeline may be in trouble, however. The state of Michigan just launched a lawsuit, which could force Enbridge to shut the pipeline down. Michigan is concerned about the possibility of a leak from the aging pipeline, which crosses under the Straits of Mackinac. A leak could threaten drinking water and spoil the scenic Great Lakes.

Governor Gretchen Whitmer promised to stop the “flow of oil through the Great Lakes as soon as possible.”

Enbridge has been trying to build a replacement for the pipeline, which is nearly 70 years old. But the replacement proposal has been a huge point of contention. Michigan’s attorney general is hoping to shut it down. The risk the state most fears is an anchor strike.

“The location of the pipelines…combines great ecological sensitivity with exceptional vulnerability to anchor strikes,” Michigan AG Dana Nessel said. An anchor strike occurred in 2018 and was viewed as a near disaster.

“This situation with Line 5 differs from other bodies of water where pipelines exist because the currents in the Straits of Mackinac are complex, variable, and remarkably fast and strong.”

Enbridge argues that it inked a deal with the former Michigan governor last year, which would have allowed Enbridge to build a tunnel underwater to house the pipeline and allow the system to continue to operate. The new Democratic administration has tossed that agreement aside.

“We remain open to discussions with the Governor, and we hope we can reach an agreement outside of court,” Enbridge said in a statement.

“We believe the Straits tunnel is the best way to protect the community and the Great Lakes while safely meeting Michigan’s energy needs.”

The issue may seem like a local problem, but it would have regional, national and international implications. For one, refineries in Sarnia would struggle to replace the oil flows. According to Stratas Advisors, the refineries would be able to find alternative supplies from Line 78B, a pipeline from the U.S. Midwest, but there would be significant disruptions.

“If Enbridge Line 5 closes, Line 78B will be able to provide enough light crude for Sarnia refineries. There would be a shortage of light crude supply for Montreal, Kinatone and Nanticoke refineries,” in Eastern Canada, Stratas Advisors wrote.

“If contractual restrictions between Enbridge and non-Sarnia refineries lead to a shortage of light crude supply to Sarnia refineries, trucks and railroads would be used to transport the required light crude. Until the whole supply chain comes to an equilibrium, the refineries will run at low utilization.”

S&P Global Platts also said that rail could help pick up the slack if the pipeline is shut down.

If Line 5 has to shut down, it “would cause a huge disruption of light crude supply to Eastern Canada and US Mid-Continent refineries,” Statas Advisors said.

Meanwhile, the disruption upstream would also be significant. Canada’s oil producers suffered from steep discounts last year because of midstream bottlenecks. Some rail capacity has eased the constraint, but the inability to build new pipelines has hurt the industry. Ultimately, Alberta implemented mandatory production cuts, which helped rescue depressed Western Canada Select prices.

Now, the Canadian government is hoping to build its nationalized Trans Mountain Expansion pipeline, although that project is still riddled with uncertainty, even with the latest approval from Ottawa. First Nations and environmental groups have vowed to fight the project. Even if all goes according to plan, it would not come online for several years at the earliest.

At the same time, Enbridge is also running into trouble with another of its aging pipeline. It has proposed building a replacement for its Line 3 pipeline, which also carries oil from Alberta to the U.S. The project has run into roadblocks in Minnesota, forcing delays in construction.

If Line 5 is forced to shut down, taking 540,000 bpd of takeaway capacity offline, it would almost surely exacerbate midstream bottleneck, and would likely steepen discounts that Canadian oil producers face.


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