A block in the (international) road

Gordon Cope discusses how the crossborder movement of energy products in North America faces an uncertain future in the face of environmental opposition.

The movement of oil, gas and refined products across the borders of Canada, the US and Mexico has been a mainstay of free trade between the three countries for several decades. The immense expansion of energy trade is now being challenged by environmental opposition, however, and the future is anything but clear.

Canada and US crude Over the course of the last decade, the movement of crude from Canada to the US has grown at a tremendous clip. In 2010, Canada supplied approximately 13% of US refinery input, but by 2019, it had grown to over one third; Canada was exporting approximately 3.8 million bpd prior to COVID.

As the pandemic recedes, exports are expected to rise to 4.45 million bpd by the end of 2021. The increase in exports has been driven by several factors. Oilsands output has been discounted for the last several years due to pipeline constraints, making it much more affordable than Middle East imports. Midwestern refineries are configured to take heavy crude (it would be costly to reconfigure for US light, tight shale oil). Finally, other sources of heavy crude, such as Mexico and Venezuela, have reduced exports or fallen under sanctions.

US exports of crude to Canada have also expanded. Canada’s major refineries are located in Ontario and Quebec, but crude from the US accounted for a tiny fraction of input a decade ago; by 2019, that number had swelled to 45% of feedstock (around 450 000 bpd), as light, tight shale oil from the Bakken in North Dakota made its way to market.

Altogether, total petroleum trade volume between the United States and Canada doubled to 2 billion bbls per year over the last decade. Most of this is in the form of crude; almost 5.5 million bpd now crosses the border in both directions. In all, the category of petroleum trade accounts for just under US$96 billion annually, exceeded only by the auto sector, at US$102 billion.

Natural gas Western Canada produces approximately 16 billion ft3/d of natural gas, far in excess of domestic needs. Canada has long been a major supplier of natural gas to the US, averaging 8.9 billion ft3/d in 2010. Over the last several years, however, shale gas from Appalachia has slowly replaced Canadian supplies, and imports from the north stood at 7.4 billion ft3/d in 2019. The gas travels by several major systems. The Alliance pipeline runs from northeast British Columbia to Chicago Illinois, a distance of 3848 km; it transports an average of 1.6 billion ft3/d. TC Energy’s 3400 km Great Lakes system exports approximately 2.4 billion ft3/d from a border crossing in Manitoba the US Midwest and ultimately to the USGC. Although overall exports are down, demand is growing in western regional markets. In April 2021, TC Energy announced it is spending over US$1.3 billion on expansions in order to deliver more gas to the Pacific Northwest and California. When completed in 2022 and 2023, the expansions will add about 260 million ft3/d. Exports to the western region currently stand at slightly over 1.3 billion ft3/d.

Gas production in the Appalachia now sits at approximately 33 billion ft3/d. While most is consumed domestically, US gas flowing into eastern Canada averaged 2.5 billion ft3/d in 2019. The NEXUS pipeline, a 256 mile, 36 in. line running from eastern Ohio to southern Michigan and the Dawn hub in Ontario, came into service in 2018. It has a capacity of 1.5 billion ft3/d. The Rover pipeline, which entered service in 2018, runs 713 miles from processing plants in West Virginia, Ohio and Pennsylvania to Michigan and the Dawn Hub in Ontario. The system has a total capacity of 3.25 billion ft3/d. In 2020, Rover filed an application with FERC to boost its mainline capacity by 175 million ft3/d, primarily through operating efficiencies, with the aim of increasing total capacity to 3.425 billion ft3/d.

Condensates Appalachian gas contains significant quantities of natural gas liquids, which are valuable to petrochemical producers. Kinder Morgan operates the Utopia East pipeline, part of a 225 mile, US$540 million network that moves up to 50 000 bpd of ethane from central Ohio to the Canadian border at Windsor, Ontario, and on to industrial customers in Canada.

As part of its exit strategy from the Canadian pipeline sector, Houston-based Kinder Morgan recently sold its share of the Cochin pipeline to Calgary-based Pembina Pipeline for US$1.57 billion. The 2900 km pipeline moves 110 000 bpd of condensate from Chicago, Illinois, to Fort Saskatchewan, Alberta. The condensate is used to dilute oil sands bitumen for shipping to the Chicago area, then recycled. In January 2021, Pembina launched an open season to seek interested shippers for up to 14 000 bpd of additional committed capacity.

US and Mexico Mexico consumes over 8 billion ft3/d of natural gas. Domestic gas production, which is largely associated with crude production, has been dropping as giant oilfields such as Cantarell in the Bay of Campeche slowly tap out. CFE, Mexico’s national utility company, has been driving a huge increase in natural gas demand as it replaces older bunker-fuel-fired systems with gas-fired turbines.

The gap between demand and supply is being met through the growth of shale gas in Texas and New Mexico. Several new gas pipelines designed to service exports from the Permian basin in Texas to Mexico have recently entered service. Kinder Morgan’s Permian Highway Pipeline came online in early 2021, moving up to 2.1 billion ft3/d from the Waha hub in West Texas to the Gulf Coast, where it connects to lines running to Mexico. Whitewater’s Aqua Blanca began operations in early 2021, transporting 1.8 billion ft3/d to the Waha hub, where it is expected to move south to export hubs along the Whistler Pipeline when it is completed in late 2021.

There are 20 gas lines in service crossing between the US and Mexico, with a total capacity of over 11 billion ft3/d. In the spring of 2021, exports from the US to Mexico reached an all-time high of 7 billion ft3/d due to high temperatures experienced in the Mexico City region, and pipelines heading south saw significant load increases. While the 2.6 billion ft3/d Texas-Tuxpan line began operations in late 2019, it has yet to reach capacity. In April 2021, however, one third of the month saw flows above 1 billion ft3/d, a high mark for the system so far, and a harbinger for increased flows as summer temperatures peak. Further demand on the TexasTuxpan line may be generated as Cenagas plans to add 1 billion ft3/d incremental capacity to its Montegrande interconnect in central Mexico, as well as alterations to the 1.3 billion ft3/d Cempoala compressor station that will allow US gas to reach southern Mexico.

Crude and products Mexico and the US trade a substantial amount of petroleum liquids. While US imports of Mexican crude have dropped from over 1 million bpd to under 600 000 bpd over the last decade, trade in refined products has grown tremendously. PEMEX has six refineries with a nameplate capacity of 1.8 million bpd, enough to meet its domestic fuel needs, but mismanagement, poor maintenance and corruption have reduced its output to under 40%, resulting in the need to import fuel. Since 2010, Mexico’s imports of US gasoline alone have risen from 100 000 bpd to almost 500 000 bpd. While most arrives by sea, several cross-border fuel pipelines have been constructed and approved, including Nustar’s 24 000 bpd diesel line in Laredo, Texas.

Challenges For several decades, the free flow of energy between Canada, the US and Mexico has been guaranteed through bilateral agreements. The election of Joe Biden as president in 2020 is placing international pacts in jeopardy, however. On his first day in the White House, President Biden cancelled TC Energy’s Keystone XL pipeline. Initially proposed in 2008 as a 2000 km express line to deliver 830 000 bpd of Alberta crude to the USGC, the Obama administration refused to approve a crossborder permit. President Trump used an executive order to reverse the decision, but Biden’s move is considered to be the nail-in-the-coffin for the US$8 billion project.

In addition to the cancellation of Keystone XL, crude exporters in Canada face further pipeline complications. Enbridge Line 5 transports 540 000 bpd from Canada (and North Dakota) through Michigan to Ontario and Quebec. The line has been operated safely for over 60 years, and Enbridge has been doing extensive upgrades to the system to ensure safe operation. In late 2020, however, Michigan Governor Gretchen Witmer ordered Line 5 to shut down operations by 13 May, 2021, due to the potential for spills where it passes under the Straits of Mackinac in the Great Lakes. Although there have never been

any leaks in the Straits, and Enbridge has received approval to replace the pipeline using a tunnel to greatly increase integrity, the issue remains at a standoff. Enbridge has sought legal relief, and the case is being heard in a US federal court. Ottawa has strenuously objected to the move, and is considering invoking the 1977 Transit Pipelines Treaty, which was negotiated to stop either country from impeding the flow of oil in transit. While the May deadline passed without closure, an eventual shutdown would affect refineries in Sarnia, Ontario, as well as millions of consumers in both Canada and the US.

Enbridge’s Line 3 crude pipeline, built half a century ago, was designed to carry 760 000 bpd from Alberta to Superior, Wisconsin, but age and corrosion reduced capacity by 50%. The refurbishment has been delayed several years by environmental lawsuits. In February 2020, the Minnesota Public Utilities Commission finally endorsed a revised environmental impact statement and allowed the refurbishment to proceed. Environmental and Indigenous groups filed a legal challenge; the Minnesota Court of Appeals ruled in June 2021, that the Commission’s decision was justified. Since then, protestors have periodically occupied ROW sites in an attempt to disrupt construction.

Cold snap in Texas Weather had a major impact on gas exports to Mexico. In February 2021, a polar vortex hit the state of Texas, causing gas wells to freeze and production to drop from around 24 billion ft3/d to as low as 11 billion ft3/d. The weather crisis illustrated weaknesses in the state’s gas delivery system. Most natural gas pipes are filled with associated gas derived from shale oil wells, because it is easier to access under normal conditions. When power lines supplying Permian basin fields failed, compressors went down, leaving the gas stranded. While Texas has a large amount of gas storage and the nameplate capacity to replace the downed production, complications arose, creating massive shortages that affected state consumers and exports to Mexico. In the latter case, exports dropped from an average of 5.7 billion ft3/d prior to the polar vortex, to 3.8 billion ft3/d. Mexico scrambled for replacement using its LNG import facilities on the Pacific and Gulf of Mexico coasts, but it took over a week for deliveries to return to normal. Mexico’s utilities and regulatory bodies are looking at increasing gas storage facilities to ameliorate similar disruptions in the future.

The future Regardless of Keystone XL’s cancellation, USGC refiners are increasingly relying on Canadian heavy crude to fill their feedstock slates. Enbridge is the largest crude exporter to the US, shipping over 3 million bpd on its extensive network. The Calgary-based company is increasing capacity to the US through incremental additions. The renovation of Line 3 running through Minnesota, and the expansion of Southern Access connecting to Patoka, Ill. (both expected to be completed in 2021), will add around 375 000 bpd capacity to the US Midwest.

In conclusion, pipeline opponents have waged an increasingly successful battle against fossil fuels by delaying or canceling pipelines, especially cross-border lines that require both state and federal approval. While the tactics have impeded the international movement of energy in North America, demand for fossil fuels is expected to remain strong for the next several decades, and pipelines will remain the most efficient, cost-effective and safest means of transportation.