On­tario could see bump in gas prices if En­bridge’s Michi­gan line stays shut

Court bat­tle erupts as state judge or­ders halt to op­er­a­tions on key pipe­line

Calgary Herald - - FINANCIAL POST - GEOFFREY MOR­GAN gmor­gan@na­tion­al­post.com Twit­ter: ge­of­frey­mor­gan

A Michi­gan judge’s de­ci­sion to shut a key En­bridge Inc. oil pipe­line run­ning across North Amer­ica, could send gaso­line and diesel prices soar­ing in On­tario and Que­bec and re­finer­ies scram­bling to se­cure oil sup­plies.

On Thurs­day, North Amer­ica’s largest pipe­line op­er­a­tor suf­fered a ma­jor set­back af­ter a Michi­gan judge sided with the state’s at­tor­ney gen­eral and or­dered op­er­a­tions to halt at Line 5. En­bridge had shut down the pipe­line com­pletely last week af­ter an un­der­wa­ter an­chor shifted on the east leg, but re­sumed op­er­a­tions on the west leg af­ter two days. The de­ci­sion was dis­puted by the state’s at­tor­ney gen­eral which sought an in­junc­tion.

Line 5’s shut­down could be a blow for ev­ery re­fin­ery in south­ern On­tario, which de­pends on it for its crude sup­plies.

“Should Line 5 re­main out of ser­vice for an ex­tended pe­riod, into mid July, pro­duc­tion rates at our two re­finer­ies will be re­duced,” Im­pe­rial Oil Ltd. spokesper­son Jon Hard­ing said Fri­day. Im­pe­rial op­er­ates two re­finer­ies in On­tario. The com­pany’s Sar­nia re­fin­ery pro­cesses 119,000 bar­rels of oil per day and its Nan­ti­coke re­fin­ery pro­cesses 113,000 bpd.

“Re­duc­ing rates will likely re­sult in short­falls of gaso­line, diesel and jet fuel in our dis­tri­bu­tion points in south­ern On­tario. That would hap­pen within ap­prox­i­mately a week,” Hard­ing said.

Sun­cor En­ergy Inc. and Shell Canada Ltd. also op­er­ate re­finer­ies in On­tario that de­pend on Line 5 for oil de­liv­er­ies.

“We are work­ing hard to con­tinue to de­liver the prod­ucts our cus­tomers need and de­pend on,” Shell spokesper­son Tara Le­may said in an emailed state­ment.

Sun­cor spokesper­son Sneh See­tal said: “Due to our in­te­grated model and vast lo­gis­tics net­work, we have some flex­i­bil­ity to mit­i­gate any short-term im­pact. For ex­am­ple, we can bring in crude into Mon­treal by ship and the Port­land Mon­treal Pipe­line.

“That said, Line 5 is a crit­i­cal line that feeds our re­fin­ing as­sets which in turn pro­vides valu­able end use prod­ucts for con­sumers,” See­tal said, adding the com­pany’s other op­tions are more costly. Line 5 runs through the Straits of Mack­inac be­tween Lake Michi­gan and Lake Huron, from Al­berta through Michi­gan en route to On­tario, and is part of En­bridge’s mas­sive North Amer­i­can Main­line net­work that con­nects Al­berta to U.S. Mid­west re­finer­ies.

A reg­u­la­tory fil­ing from En­bridge shows south­ern On­tario re­finer­ies are de­pen­dent on En­bridge’s Line 5 and to a lesser ex­tent Line 78 and Line 95 pipe­lines.

With Line 5 shut down, an­a­lysts say the other sec­ondary lines, such as Line 78 and Line 95, might be over­whelmed and En­bridge would be forced to al­lo­cate space on those lines, so there would still be sup­ply short­falls as com­pa­nies scram­ble to move crude onto other pipes.

A source in the re­fin­ing in­dus­try said those re­finer­ies are “all screwed with­out Line 5.”

As many as seven re­finer­ies rely di­rectly and pri­mar­ily on Line 5 for oil de­liv­er­ies, an­a­lysts be­lieve. In ad­di­tion to the four re­finer­ies in On­tario, Marathon Pe­tro­leum Co.’s 147,000-bpd re­fin­ery in Detroit, Mich. re­lies mainly on Line 5. Sim­i­larly, BP Plc. and PBF En­ergy Co. both op­er­ate re­finer­ies in Toledo, Ohio.

Un­like Cana­dian re­finer­ies how­ever, those Amer­i­can re­finer­ies have links to other pipe­line net­works. The real pinch will be felt in On­tario and, to a lesser ex­tent, Que­bec.

“It’s go­ing to be felt at the pump,” said Phil Skol­nick, an en­ergy an­a­lyst at Eight Cap­i­tal in New York.

“There’ll be less prod­uct in the mar­ket in that Greater Toronto Area, so nat­u­rally prices will go up. Gaso­line goes up. Diesel goes up.”

En­bridge had shut down the line af­ter dis­cov­er­ing an an­chor hold­ing the pipe­line in place at the bot­tom of the Straits of Mack­inac had shifted. Af­ter in­spect­ing the an­chor and line, the com­pany at­tempted to restart one of the two un­der­wa­ter pipes — prompt­ing a re­ac­tion from Michi­gan’s state gov­ern­ment.

The next court hear­ing on the case is sched­uled for June 30 and an­a­lysts say if the line doesn’t restart then, there could be sup­ply short­ages and price spikes in south­ern On­tario and po­ten­tially Que­bec and the U.S. Mid­west shortly there­after.

Stifel Firsten­ergy an­a­lyst Michael Dunn said com­pa­nies are likely try­ing to make con­tin­gency plans ahead of the June 30 court date and “scram­bling to make other lo­gis­ti­cal ar­range­ments and not just wait.”

One is­sue that may dampen the ef­fect of the oil sup­ply dis­rup­tion is the COVID -19 pan­demic, which had re­duced de­mand for crude.

“Given re­duc­tions in de­mand for pe­tro­leum, while Line 5 is a key as­set link­ing oil pro­duc­ers to re­fin­ers in Sar­nia and Detroit, I don’t yet see this be­ing a ma­jor prob­lem that would im­pact prices,” said Pa­trick De Haan, head of pe­tro­leum anal­y­sis at Gas­buddy, a gas-price track­ing site. How­ever, the im­pact could lead to higher prices de­pend­ing on the length of the shut­down, he said.

Mo­bil­ity data from Apple Inc. show that af­ter a sharp de­cline in car traf­fic when the coro­n­avirus pan­demic forced peo­ple to stay at home, car trips in Toronto have re­cov­ered. In fact, on June 24, there were 10 per cent more peo­ple driv­ing than on Jan. 13, 2020.

Should Line 5 re­main out of ser­vice for an ex­tended pe­riod, into mid July, pro­duc­tion rates at our two re­finer­ies will be re­duced.

PAUL MORDEN

A court hear­ing in the bat­tle be­tween En­bridge and the state of Michi­gan is sched­uled for Tues­day and an­a­lysts say if the key Line 5 doesn’t restart then there could be sup­ply short­ages and price spikes in south­ern On­tario and po­ten­tially Que­bec shortly there­after.

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