The Bullet Line: Keystone Xl Will Link Alberta Directly To The Gulf

By Graham Chandler

It looks like a go, assuming market forces prevail. "We've got enough contracts now to proceed," says Robert Jones, TransCanada's VP of the Keystone Pipeline project. "The system [Keystone Pipeline together with Keystone XL] will be able to move 1.1 million barrels per day and we have contracts for a little over 900,000 now." And those contracts are long-term, too. "Most are 20 years, but our average is something like 17 or 18 years," Jones says.

National Energy Board (NEB) hearings on Keystone XL occurred in September and TransCanada is optimistic about receiving regulatory approval. American refineries already process 60 per cent of Alberta's bitumen production and they want more. Gulf Coast imports from Mexico and Venezuela have dropped 24 per cent in the past four years, and the Keystone XL express or bullet line is the cheapest way to replace that oil.

Producers are equally eager to oblige. By 2013, the Canadian Association of Petroleum Producers estimates, Alberta's oilsands output will increase by 1.1 million barrels per day. One of the first to sign onto the Keystone project was Canadian Natural Resources Ltd., committing 120,000 barrels per day (bbl/d) for 20 years from its Horizon oilsands project.

TransCanada, traditionally a natural gas shipper, has made a massive commitment to oil through its Keystone pipeline system, of which XL forms a part. TransCanada became sole owner of the project after agreeing to buy out ConocoPhillips' share in June this year.

Total capital cost for the Keystone project is expected to hit US$12 billion. Approximately $2.7 billion has been spent to date with the remaining $9.3 billion to be invested between now and the end of 2012. To mitigate risk, TransCanada says capital costs related to Keystone construction are subject to a capital cost risk-and-reward sharing mechanism with its customers.

The first phase of Keystone is already under construction. With a nominal capacity of 435,000 bbl/d, it spans 3,456 kilometres from Hardisty, Alta., to U.S. Midwest markets in Wood River and Patoka, Illinois. A large section of this line, through Saskatchewan and Manitoba, is a conversion of TransCanada's original 1958 natural gas pipeline. Commissioning is expected to begin in late 2009 with commercial operations to follow in early 2010. The line will be expanded to a capacity of 590,000 bbl/d and extended to Cushing, Oklahoma. That segment is scheduled to come on stream late next year.

Keystone XL will expand and extend this system. Currently under regulatory application in Canada and the U.S., it will offer additional capacity of 500,000 bbl/d direct from Hardisty to the U.S. Gulf Coast in 2012. The express line, sometimes referred to as a bullet line, will be 2,720 kilometres (1,690 miles) in length, from Hardisty in east-central Alberta to a delivery point near existing terminals in Port Arthur, Texas.

Construction of the expansion facilities is anticipated to begin in 2010 following regulatory approvals. It's aimed squarely at companies with oilsands projects due to start up in the 2009 to 2012 period, who want transportation in service when their crude is ready to flow.

To streamline construction, TransCanada has brought in some innovations to traditional methods. XL incorporates 41 virtually identical pump stations-about one every 80 kilometres-which offer the advantage of mass-production. And they're large stations with two or three pump units apiece, each driven by 6,500-horsepower electric motors. If future expansions are made, each station can house five pumps driven by a total of 32,500 horsepower. It took some innovative thinking.

"We wondered, how can we build all these pump stations so that they can come on all at the same time and work?" says Jones. "We thought about it and came up with a modularized pump station design. We tried to create cookie-cutters and going to a general contractor, instead of being stick-built." The pipeliner wanted as much as possible manufactured off site-electrical houses, motors, pumps, skids, measurement and control systems, etc. "Our approach to this was to get it done in time, and do it effectively," the TransCanada VP comments.

Eventually the pipeline firm selected two contractors but with the same specifications, including a group of GE companies and a consortium under Siemens. Another collection of contractors will do the civil work at each location. TransCanada supplies them with the modularized pump and motor platform on a base. "All the contractor has to do is like a Meccano set-tie in all the electrical and the mechanical piping." Jones says. The strategy is not unique, he adds, "but for traditional crude oil pipelines that I've been involved in, we typically did everything on site."

Average depth of cover over the buried pipe is four feet, "which minimizes damage caused by third-party strikes," says Jones. "So a number of our contractors decided to go with backhoes rather than using traditional wheel ditchers. When we went to buy easement, a lot of landowners were really supportive of that." For coatings, TransCanada decided to use fusion-bonded epoxy. "And we went with the two-part epoxy to coat the welding joints," Jones says.

Because of the distances involved, typically constructors divide pipeline builds into regional portions known as spreads. "We had the challenge of dividing the construction across three provinces and seven states," Jones notes. The Alberta work is divided into two spreads built from a single camp. Work in the south will be done in one season, while construction in the north will be done in the second season.

The American portion of the XL project incorporates eight spreads. "We did two last year, starting at the border and working south," Jones says. Distances completed depend on a number of factors, he adds: "You look at what a typical contractor can do in a season. On the Prairies, they can do about 120 miles [194 kilometres]. So two started in North Dakota, and by the end of 2008 we were completed there plus a little piece of South Dakota." From there to Illinois, the Keystone VP says, the spreads are about equal in length, each assigned to a different contractor.

Keystone will move whatever fluids need to be moved, although its main product is expected to be bitumen. "We build to traditional North America pipeline specs, which are viscosity-based," Jones says. "It doesn't matter if it's been upgraded to synthetic crude or it's a blend." Western Canada Select, for example, is a combination of bitumen plus blending synthetic, light crudes, and conventional heavy crude.

And there's competition. Keystone XL is one of several export pipelines under construction or in the planning stages being considered in light of anticipated new bitumen production. In fact, the spectre of temporary overcapacity looms because lower crude prices have slowed upstream development of new supply.

Enbridge, whose pipeline system to eastern markets has long moved western Canada's crude, has presented evidence to the NEB indicating Keystone XL would "create an unnecessary and unprecedented level of excess pipeline capacity between western Canada and U.S. markets." The result would be higher overall tolls, according to Enbridge, so regulatory approval of XL would not be in the overall Canadian public interest.

Jones isn't worried. "With regard to all the competing projects, the market will decide what eventually gets built," he says. "I think what the market has determined is they never want to be short of pipeline capacity. And of course none of these projects is small; they don't come in tens of thousands of barrels per day capacity. It's the economics; these are hundreds of thousands of barrels per day capacity at a time-usually up to 600,000 a day. So the market needs to be confident."

Another possible hurdle to bitumen shipments is proposed U.S. legislation against importing so-called "dirty oil," typically defined as any foreign crude whose production causes more greenhouse gas emissions than American crude. A harbinger of whether the legislation will have teeth or not came with this August's State Department permit issued to Enbridge for its Alberta Clipper bitumen pipeline to Superior, Wisconsin. Environmental activist organization Earthjustice issued a news release claiming the decision "contradicts President Obama's promise to cut global warming pollution and America's addiction to oil while investing in a clean energy future."

Again, Jones shows little worry. "We're not yet sure what the legislation is going to be," he says. I think the fact of the matter is that this crude oil meets a demand that the U.S. requires. They've already got a number of refineries looking for alternate sources, other than Mexico, Venezuela, or the Middle East." There can be also be weather-related problems with crude oil supply. "With oil that's imported on supertankers, whenever there's a hurricane like Katrina or Rita, those tankers have to stay way outside the Gulf Coast," the TransCanada VP says. "A pipeline gives them another source of crude oil which is far more reliable than tankers. So for a secure source of supply Canada is considered the source of choice."

His optimism is shared by Bill Gwozd, VP of Ziff Energy Group, who has been analyzing oil and gas markets for 30 years. "At the end of the day, the EIA [Energy Information Administration] has been quite clear insofar as the U.S. will continue to be required to import oil and natural gas." Beyond the physical need for hydrocarbons, the independent analyst comments on the political element: "When you have turmoil in other [oil-producing] countries it's very challenging to import energy-and this is the way the U.S. will be based for the next 25 years."