TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 1 of 14
NATIONAL ENERGY BOARD
IN THE MATTER OF the National Energy Board Act, R.S.C. 1985,
c. N-7, as amended, and the regulations made thereunder;
AND IN THE MATTER OF an Application by TransCanada Keystone
Pipeline GP Ltd. for a Certificate of Public Convenience and Necessity and
related approvals under the National Energy Board Act.
TRANSCANADA KEYSTONE PIPELINE GP LTD.
Application for
Certificate of Public Convenience and Necessity
Keystone XL Pipeline
OH-1-2009
Reply Evidence
of
TransCanada Keystone Pipeline GP Ltd.
September 3, 2009
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TransCanada Keystone Pipeline GP Ltd.
1
1.0
2
Q1.
INTRODUCTION AND SUMMARY
Please describe the purpose of this Written Reply Evidence of TransCanada
Keystone Pipeline GP Ltd. (“Reply Evidence”).
3
4
Reply Evidence
OH-1-2009
September 3, 2009
Page 2 of 14
A1.
In this Reply Evidence TransCanada Keystone GP Ltd. (“Keystone”) responds to
5
positions taken by intervenors through their evidence and responses to information
6
requests on that evidence.
7
Q2.
Should the fact that Keystone does not respond to all points in a particular
8
intervenor’s evidence or to all intervenor evidence be taken as acceptance by
9
Keystone of any of the positions of intervenors?
10
A2.
No. Keystone does not accept any of the intervenor positions that are contrary to the
11
Application. Some of those positions will be dealt with by Keystone in cross-
12
examination and argument rather than reply evidence, and others will simply be left to
13
the Board to determine on the basis of the filed evidence alone.
14
Q3.
How is this Reply Evidence organized?
15
A3.
The Reply Evidence responds to positions taken by:
16
•
Alberta Federation of Labour (“the AFL”); and
17
•
Enbridge Pipelines Inc. (“Enbridge”).
18
2.0
19
Q4.
ALBERTA FEDERATION OF LABOUR
The AFL states that Keystone’s proposed toll only reflects a small portion of the
20
actual cost difference between shipping light and heavy crudes and observes that
21
capital and operating costs associated with pipelines shipping heavy crudes are
22
higher than those associated with shipping lighter crudes.
23
Is Keystone’s toll design appropriate?
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TransCanada Keystone Pipeline GP Ltd.
1
A4.
Reply Evidence
OH-1-2009
September 3, 2009
Page 3 of 14
Yes. The Keystone Pipeline system is designed as a batch pipeline system which
2
provides its shippers with the ability to contract for capacity and transport a variety of
3
crudes over the terms of their contracts. The actual pipeline design and capacity is
4
relatively insensitive to the total proportion of light crude shipped since volumes of heavy
5
crude essentially dictate the overall design and capacity of the pipeline. Therefore,
6
capital costs are relatively insensitive for a pipeline design such as Keystone’s which can
7
ship a variety of crudes. The Keystone XL Pipeline has been designed to provide it with
8
the ability to ship a variety of crudes, and the fixed component of the toll recovers capital
9
costs associated with that design. The variable toll recognizes the differing costs to
10
transport different crude types.
11
The Keystone toll design is market-based and has been negotiated by sophisticated
12
parties that are likely interested in transporting both heavy and light crudes over the term
13
of their contracts. The fact that these parties have agreed to the negotiated toll design
14
indicates the proposed differential is reasonable. In addition, the Keystone XL toll design
15
is identical to that considered for the base Keystone pipeline projects and approved by the
16
Board in decisions OH-1-2007 and OH-1-2008.
17
Q5.
The AFL suggests a larger difference between light and heavy crude tolls would be
18
likely to result in the construction of upgraders in Alberta. What are Keystone’s
19
views on this suggestion?
20
A5.
Keystone believes the differential between light and heavy pipeline tolls will be unlikely
21
to affect market decisions on development of upgraders. Keystone understands that the
22
primary drivers for upgrading development decisions are price differentials between light
23
and heavy crudes as well as the development and capital cost environment. Typical
24
pipeline light/heavy toll differentials are relatively small when compared to these primary
25
drivers.
26
27
Q6.
AFL proposes that the National Energy Board (“NEB” or “Board”) require
Keystone to undertake a detailed study of the actual cost differences for
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 4 of 14
1
transporting different qualities of crude. Does Keystone view such an evaluation to
2
be necessary or useful?
3
A6.
Keystone believes that such a study is unnecessary and would not be useful because costs
4
are appropriately reflected in the proposed toll design. Undertaking a study with a view
5
to potentially making changes to the toll design would interfere with a negotiated,
6
market-based commercial arrangement and a toll structure that has been consistently and
7
successfully negotiated through the various Keystone project phases and also previously
8
approved by the Board in decisions OH-1-2007 and OH-1-2008.
9
3.0
10
Q7.
How is Keystone’s reply to Enbridge’s evidence organized?
11
A7.
Keystone’s Reply Evidence begins with a description of the state of development and
Enbridge Pipelines Inc.
12
viability of the concept Enbridge has characterized in its evidence as the “Gretna
13
Option”. It then deals with a number of issues that would need to be assessed to make an
14
informed and meaningful determination of the viability of the Enbridge concept.
15
Keystone then discusses the actions taken by Enbridge since the summer of 2008.
16
Enbridge asserts a dramatic change in the economic environment since that time, and it is
17
that change Keystone understands to be the basis for Enbridge advancing the concept in
18
its evidence. Keystone replies to Enbridge’s assertion that the Keystone XL Pipeline
19
would create excess pipeline capacity from the Western Canada Sedimentary Basin
20
(“WCSB”). Keystone’s Written Reply Evidence concludes with a discussion of the
21
impacts that would be associated with the denial or delay of the Keystone XL
22
Application.
23
Q8.
Enbridge suggests that there is an opportunity for Keystone to participate in an
24
“enhanced project” by utilizing existing Enbridge pipeline facilities in Canada.
25
Does Keystone agree?
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TransCanada Keystone Pipeline GP Ltd.
1
A8.
Reply Evidence
OH-1-2009
September 3, 2009
Page 5 of 14
No. There is no “enhanced project” that has been negotiated or for which negotiations
2
have even commenced. There is no “enhanced project” before the Board seeking facility
3
or toll approvals that could be implemented and that could provide an alternative to the
4
Keystone XL Pipeline project. There is no apparent evidence of broad-based industry
5
support for an “enhanced project” or if such industry support exists, there is no current
6
evidence of that support.
7
Q9.
options to the Keystone XL Pipeline project?
8
9
Does this mean that Keystone is not prepared to discuss the viability of alternative
A9.
No. As Keystone has indicated, 1 it is willing to consider formal proposals that deal with
10
the key threshold issues, but it is not prepared to respond to concepts or otherwise
11
develop or negotiate concepts in a regulatory proceeding. Enbridge has never presented
12
its concept to Keystone and it appears to have received very little review or scrutiny from
13
CAPP or industry. The concept was first introduced publicly in July 2009 as evidence in
14
the current proceedings without supporting commercial detail or substantive analysis or
15
assessment.
16
Enbridge concedes that “further discussions” with CAPP and Keystone would be
17
required. Keystone believes “further discussions” includes everything typically found in
18
the development, structuring, negotiating and executing of a project. No commercial
19
discussions have occurred with Enbridge. Considering the infancy of the concept, the
20
numerous stakeholders involved and the complexity of structuring multi-billion dollar
21
deals, Keystone believes that such discussions could be very lengthy and may well
22
ultimately not reach a successful conclusion.
23
Any delay in rendering a decision on the Application in order to provide time to consider
24
the Enbridge concept will have the same effect as denying the Keystone XL Pipeline
25
Application and the Keystone XL project will not proceed.
1
Keystone Response to National Energy Board Information Request 3.
Adobe Page 5 of 37
TransCanada Keystone Pipeline GP Ltd.
1
Q10. On the basis of the limited information available, does Keystone believe the
Enbridge concept is viable?
2
3
Reply Evidence
OH-1-2009
September 3, 2009
Page 6 of 14
A10.
No. On the basis of the superficial information presently available, Keystone believes
4
that a number of threshold issues exist that make the Enbridge concept non-viable.
5
Q11. What threshold issues would need to be assessed before an informed and
meaningful determination of the viability of the Enbridge concept could be made?
6
7
A11.
Keystone believes that issues that would need to be assessed include:
•
•
•
•
•
•
•
•
•
8
9
10
11
12
13
14
15
16
delayed in-service timing;
negative impact on quality;
increased transit times;
capacity constraints;
economic benefit;
shipper choice;
growth opportunities;
higher ultimate capital cost; and
higher operating cost.
17
Q12. Please elaborate on the threshold issues identified by Keystone.
18
A12.
Delayed In-Service Timing
19
Considering the lack of definition around the Enbridge concept, the numerous
20
stakeholders involved and the complexity of structuring multi-billion dollar deals,
21
Keystone believes that commercial discussions would be very lengthy and early
22
agreement would be unrealistic, if not impossible. Even assuming expedited progress of
23
commercial discussions related to a potential alternative to the Keystone XL Project,
24
Keystone believes an alternative project could not be completed for a number of years
25
beyond the target completion date of 2012, the timeframe required by Keystone’s
26
shippers.
27
Significant regulatory processes in the United States (“U.S.”) and Canada for the
28
Keystone XL Pipeline are well underway and are expected to be complete in early 2010.
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 7 of 14
1
Alternate U.S. routing to implement the Enbridge concept would require major re-
2
development cost and efforts, which include abandoning the current U.S. state and
3
federal regulatory applications, engineering and development of an alternative route,
4
significant new stakeholder consultations and filing new regulatory applications in both
5
the U.S. and Canada.
6
Keystone is proposing to construct the Keystone XL pipeline in the near term and in a
7
period during which various of the components of project risk can be identified, and in
8
many cases, mitigated. To the extent there is any delay associated with assessment of the
9
Enbridge concept, that delay exposes Keystone and its shippers to increased future
10
execution risk and construction cost risk, particularly in respect of the project
11
components downstream of Gretna.
12
Negative Impact on Quality
13
Keystone has proposed a “bullet” line from Hardisty to the United States Gulf Coast
14
(“USGC”). The bullet design and avoidance of breakout tankage reduces product
15
degradation. The Enbridge concept would require the construction of substantial
16
breakout tankage facilities at Gretna, and would therefore be detrimental to crude oil
17
quality in comparison to the bullet pipeline design provided by the Keystone XL Pipeline
18
project. Maintenance of product quality has economic value to Keystone and its shippers
19
that would be diminished by the implementation of the Enbridge concept.
20
Increased Transit Times
21
The Keystone XL pipeline provides a shorter and more direct pipeline route than that
22
associated with the Enbridge concept. Assuming similar flow rates as those proposed by
23
Keystone XL, both the longer route and the breakout tankage associated with the
24
Enbridge concept would result in increased transit times from Hardisty to the USGC.
25
Increased transit times increase both variability of delivery times and working capital
26
costs for Keystone XL shippers.
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 8 of 14
1
Capacity Constraints
2
Keystone understands the Enbridge concept to involve the use of capacity on the Hardisty
3
to Gretna portion of the Alberta Clipper pipeline (“Clipper”) to provide transportation
4
access to Keystone. The stated capacity of the Clipper project is 71,500 m3/d
5
(450,000 bbl/d).
6
To provide transportation capacity sufficient to meet current contract and spot shipment
7
requirements, Keystone requires capacity exceeding the contractual commitments to the
8
USGC of 60,400 m3/d (380,000 bbl/d). The minimum initial capacity requirement for
9
Keystone is 79,500 m3/d (500,000 bbl/d) to the USGC, with expandability to
10
111,300 m3/d (700,000 bbl/d), which exceeds the stated capacity of Clipper.
11
Economic Benefit
12
The Enbridge concept proposes to provide access to capacity to Keystone, presumably on
13
a contract basis, where the toll payable to Enbridge by Keystone would be a pass through
14
of the tolls that would otherwise have been payable by Keystone XL shippers to
15
Keystone. Such an arrangement would effectively deprive Keystone of the opportunity
16
to make the investment in the Canadian portion of the Keystone XL project and the
17
ability to earn a return on that investment.
18
Enbridge and Keystone both compete for growth investment opportunities, including the
19
opportunity to expand their existing systems to serve the USGC. Keystone was able to
20
secure the necessary contracts to proceed with its USGC expansion. It appears to
21
Keystone that Enbridge elected to prebuild the upstream capacity in Canada to feed its
22
expansion projects, including the proposed USGC expansion, and did not receive the
23
market support necessary to proceed with all these projects. The Enbridge concept, if
24
implemented, would have the effect of transferring to Enbridge the benefits of the growth
25
investment opportunities achieved by Keystone in a fair and transparent market process.
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 9 of 14
1
No commitment is made by Enbridge respecting the certainty of spot toll pricing or the
2
availability of spot capacity. The lack of control by Keystone over spot capacity and
3
associated tolls would economically impact Keystone by either reducing or eliminating
4
spot shipments or reducing the return achieved.
5
There is no information on how the transportation fee that would be paid to Enbridge
6
under the concept would compare to the revenue requirement recovery approved in the
7
Alberta Clipper Canada Settlement or how or whether any potential variances might be
8
recovered.
9
Shipper Choice
10
By supporting Keystone and its expansion to the USGC, Keystone XL shippers have
11
indicated that they are seeking a competitive alternative to the Enbridge system, a market
12
decision they have supported financially by entering into long-term shipping
13
arrangements. If implemented, the Enbridge concept would ignore the outcome of that
14
competitive process and the determinative choices made by Keystone XL shippers.
15
Growth Opportunities
16
Keystone is an at-risk pipeline for throughput. It expects to transport volumes exceeding
17
the currently committed contract level and also expects to transport volumes in the period
18
following the expiration of the Transportation Service Agreement (“TSAs”). Keystone
19
will achieve an overall acceptable return in the long run if it does so.
20
The implementation of the Enbridge concept in which capacity access is limited to the
21
current contracted levels to the USGC removes the opportunity for Keystone to take
22
advantage of market growth opportunities during the terms of the TSAs and opportunities
23
to earn a return after the expiration of the TSAs. The Enbridge concept would have the
24
effect of constraining Keystone’s ability to attract further volumes as a result of uncertain
25
or insufficient access to capacity on the Enbridge system.
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 10 of 14
1
Keystone XL has been designed to transport 79,500 m3/d (500,000 bbl/d) to the USGC
2
and can be economically expanded by 31,800 m3/d (200,000 bbl/d) by adding pumping
3
units to its pump stations. The implementation of the Enbridge concept would result in
4
Keystone losing the ability to expand cost-effectively, and would deprive Keystone of the
5
ability to earn a return on potential system expansion.
6
Higher Operating Costs
7
The distance from Hardisty to Steele City via Gretna is about 210 kilometres or about
8
11% longer than the distance from Hardisty to Steele City via the Keystone XL route.
9
The longer pipeline path of the combined Canadian and U.S. segments of the Enbridge
10
concept route would likely result in higher operating costs due mainly to increased power
11
consumption and operating and maintenance expenses for the same throughput.
12
The Enbridge concept does not address how potential increased operating costs would be
13
treated, and how and from whom any potential shortfall in operating costs might be
14
recovered.
15
Higher Capital Costs
16
Implementation of the Enbridge concept could create higher capital cost expenditures in
17
both Canada and the U.S. In the near term, construction of new terminalling facilities at
18
Gretna, Manitoba would be required. Keystone requires capacity in excess of the
19
60,400 m3/d (380,000 bbl/d) Enbridge has indicated would be available. Consequently,
20
there may be additional facilities that would be required to be constructed on the Hardisty
21
to Gretna route in order to provide sufficient capacity to transport the Keystone XL
22
volumes.
23
Q13. Enbridge states that the economic environment has changed since the summer of
24
2008.
Those changes appear to be the basis for advancing the Enbridge concept.
25
What actions has Enbridge taken to address the changes it discusses?
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TransCanada Keystone Pipeline GP Ltd.
1
A13.
Reply Evidence
OH-1-2009
September 3, 2009
Page 11 of 14
All of Enbridge’s actions to date demonstrate a continued desire to compete successfully
2
into the USGC market. Keystone believes timely and successful resolution of the
3
concept Enbridge has raised in its evidence is inconsistent with Enbridge’s competitive
4
aspirations. Enbridge’s approach places all of the risk of not reaching resolution of a
5
conceptual access arrangement with Keystone, by allowing Enbridge to continue
6
developing its USGC proposals.
7
Since Keystone announced the Keystone XL open season in July 2008, Enbridge has
8
announced two other competing proposals to provide transportation service from Alberta
9
to the USGC. Those projects include the Trailblazer project and the Gulf Access
10
Pipeline, the latter being developed in cooperation with BP Pipelines with an expected in-
11
service date of late 2012. Enbridge continues to include its competing Texas Access
12
project in its development portfolio with an in-service of 2014.
13
In a follow up letter 2 to the late March 2009 meeting with CAPP referenced in the
14
Enbridge evidence, Enbridge continued to promote a project that was essentially a full
15
path Enbridge project to Cushing and then a jointly developed new project from Cushing
16
to the USGC.
17
As recently as August 2009, Enbridge has publicly stated that it continues to pursue
18
competitive large volume pipeline solutions incorporating transportation on its mainline
19
systems to provide service between Alberta and the USGC.
20
Enbridge also plans to make application later this year for its Northern Gateway project
21
to provide transportation service from the WCSB to the west coast. The capacity of the
22
proposed pipeline is 83,500 m3/d (525,000 bbl/d) and has an in-service date of Q4 2015
23
at the earliest.
24
Q14. Enbridge states that Keystone would “create” excess pipeline capacity between
Western Canada and U.S. markets. Does Keystone agree?
25
2
Enbridge Response to KSG Information Request 1.06(b).
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TransCanada Keystone Pipeline GP Ltd.
1
A14.
Reply Evidence
OH-1-2009
September 3, 2009
Page 12 of 14
No. Keystone is pursuing construction of additional pipeline capacity between Alberta
2
and the USGC in response to the requests of its shippers and the marketplace. No excess
3
capacity currently exists between Western Canada and the USGC. The Keystone XL
4
Pipeline will be well utilized as the pipeline is underpinned by shipper commitments for
5
over 75% of capacity to the USGC for an average initial term of 17 years. Any risk of
6
unsubscribed pipeline capacity that may exist on the Keystone Pipeline system is
7
ultimately borne by Keystone.
8
In July 2008 Keystone announced that it had secured commitments of 47,700 m3/d
9
(300,000 bbl/d) and was proceeding with the Keystone XL expansion. The Keystone XL
10
open season results of 60,400 m3/d (380,000 bbl/d) were disclosed in late 2008 at which
11
time it was clear that Keystone had secured market support by way of long term
12
transportation contracts for its project to the USGC. CAPP crude supply forecasts
13
indicated reduced growth in supply in each of December 2008 and June 2009. CAPP
14
expressed concerns related to pipeline capacity and supply in March 2009.
15
Enbridge has known, or ought to have known since 2008, that the supply associated with
16
the long term contracts on Keystone XL would not be available to be transported on its
17
system. The management of potential future underutilization of the Enbridge system
18
should be managed directly by Enbridge and its stakeholders. To the extent Enbridge
19
may be underutilized in the future, Keystone is not the cause of that underutilization.
20
Q15. What would be the effect if the Board denied or delayed the Keystone XL
Application while the parties assessed the Enbridge concept?
21
22
A15.
The simple consequence would be to frustrate the commercial arrangements entered into
23
between Keystone and Keystone XL shippers and effectively eliminate competition.
24
Market participants explored and tested several potential transportation options for
25
service to the USCG, including that offered by Enbridge, and made the commercial
26
decision to proceed with the Keystone XL Pipeline. The commercial arrangements were
27
the product of extensive negotiation.
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 13 of 14
1
Denial or delay of the Application would result in Keystone losing the benefits of the
2
negotiated project it has achieved resulting from a competitive process to provide
3
transportation to the USGC. Keystone XL shippers would also be disadvantaged and
4
potentially exposed to financial losses, despite having in good faith entered into TSAs
5
with Keystone on the basis of a fair and transparent competitive process between
6
Keystone and Enbridge.
7
Denial or delay of the Application would also result in Keystone XL shippers
8
specifically, and WCSB producers generally, being denied timely pipeline access to the
9
USGC offered by the Keystone XL Pipeline project. Price discounting experienced in
10
recent years would be expected to persist, with attendant negative consequences for
11
WCSB producers. While announced refinery expansions may increase the demand for
12
Canadian crude in PADD II, they will not increase the number of market participants
13
available to Canadian producers or open market access and increase the number of buyers
14
of Canadian crude.
15
Denial or delay of the Keystone XL Application would create the opportunity for any
16
competitor, but particularly Enbridge, to continue promoting its own proposals to provide
17
transportation access to the USGC. Enbridge would benefit by obtaining an
18
overwhelming competitive advantage in its ongoing efforts to serve the USGC market.
19
Any delay in approval of Keystone XL works to enhance the competitive position of
20
Enbridge to the detriment of Keystone. It would clearly and significantly benefit
21
Enbridge if the Keystone XL project were to be denied or delayed. The longer the delay,
22
the more Enbridge’s competitive position is enhanced and the potential for an
23
unsuccessful outcome is increased.
24
Denial or delay of the Keystone XL project would also send a message that incumbents
25
enjoy an inherent advantage over new entrants. If the position Enbridge advocates is
26
accepted, the market signal will be that in the face of changing supply forecasts,
27
incumbents have the right to transport incremental supply notwithstanding the existence
28
of freely negotiated transportation arrangements by which supply is committed to an
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence
OH-1-2009
September 3, 2009
Page 14 of 14
1
alternate system. Acceptance of the outcome apparently advocated by Enbridge would
2
create an artificial barrier to entry for new competitors and competition.
3
Q16. In its Written Direct Evidence Enbridge discusses a report prepared by Muse,
4
Stancil & Co (the “Muse Report”). The Muse Report critiqued a report “Western
5
Canadian Crude Supply and Markets” prepared by Purvin & Gertz Inc. (“PGI”)
6
which forms part of the Keystone XL Application (the PGI Report). The PGI
7
Report was updated as part of Keystone’s Additional Written Evidence. Does
8
Keystone have any reply to the Muse Report?
9
A16.
Yes. PGI has prepared Reply Evidence which responds to aspects of the Muse Report.
10
The PGI Reply Evidence is attached as Appendix A to this Written Reply Evidence.
11
Keystone has reviewed the PGI Reply Evidence and agrees with its conclusions.
12
A17.
Does this complete the Written Reply Evidence of Keystone?
13
A18.
Yes. However, as Applicant Keystone has a right to present reply evidence after the
14
conclusion of the evidentiary cases of the intervenors. if the intervenor evidence so
15
warrants.
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Appendix A
REPLY EVIDENCE
FOR OH-1-2009
Prepared for:
TRANSCANADA KEYSTONE PIPELINE GP LTD.
Prepared by:
.
Buenos Aires – Calgary – Dubai – Houston
London – Los Angeles – Moscow – Singapore
September 2, 2009
T.H. Wise
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TransCanada Keystone Pipeline GP Ltd.
Table of Contents -- i
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................ 1
SUMMARY..................................................................................................................... 3
DISCUSSION ................................................................................................................. 5
I.
BENEFITS ATTRIBUTABLE TO KEYSTONE XL PIPELINE ...................................... 5
II.
APPLICABILITY OF HISTORICAL PRICE DATA TO THE FUTURE.......................... 7
III.
PRICING AT HARDISTY AND U.S. GULF COAST .................................................... 9
IV.
MIDWEST PRICING AND NETBACKS .................................................................... 12
V.
PRICE DIFFERENTIATION ..................................................................................... 13
VI.
KEYSTONE XL PIPELINE BENEFIT ANALYSIS ..................................................... 17
LIST OF TABLES
1 COMPARISON OF NGX, POSTINGS & PLATTS PRICING AT HARDISTY ...................... 19
.
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ii -- Table of Contents
TransCanada Keystone Pipeline GP Ltd.
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.
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TransCanada Keystone Pipeline GP Ltd.
1
Reply Evidence For OH-1-2009 -- 1
INTRODUCTION
2
Purvin & Gertz, Inc. (PGI) has reviewed the “Analysis of the Keystone XL Project Market
3
Impact”, July, 2009, Muse, Stancil & Co (“Muse”) (herein named “the Muse report”). This Reply
4
Evidence is a rebuttal to the Muse report. PGI has submitted a February 12, 2009 report entitled
5
“Western Canadian Crude Supply and Markets” (in Appendix 3-1 of the Application), (herein named
6
“the PGI February report”) and a June 16, 2009 “Supplemental” report (in Appendix 1 of the
7
Additional Written Evidence), (herein named “the PGI June report’). PGI also provided responses to
8
several Information Requests made to PGI by Enbridge (herein named “ENB IR Responses”). All
9
prices given here are in U.S. Dollars, unless noted.
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.
2 -- Reply Evidence For OH-1-2009
TransCanada Keystone Pipeline GP Ltd.
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TransCanada Keystone Pipeline GP Ltd.
1
Reply Evidence For OH-1-2009 -- 3
SUMMARY
2
The Muse report deals mainly with the Canadian heavy crude price impacts of the Keystone
3
XL Pipeline and the benefits to Canadian crude producers that are referenced in the PGI reports. The
4
Muse report does not contradict that price discounts have occurred or that they would occur beyond
5
2013 without new heavy crude pipeline capacity to new markets. PGI has explained that the benefit
6
to producers arises 1) from avoiding a return to the heavy oil price discounting circumstances that
7
have often occurred in the past and 2) from sustaining strong spot prices in the Midwest and Hardisty
8
markets. The main differences between the Muse and PGI reports are in timing and methodology in
9
calculating the price impact.
10
(I)
The Muse report, based on CAPP’s June 2009 Growth scenario, contends that the
11
ongoing expansion of the Enbridge system and the construction of Base Keystone
12
Pipeline will capture much of the benefit that PGI is attributing to Keystone XL
13
Pipeline in 2013. PGI, with its own heavy crude forecast, expects that the benefits of
14
improved heavy crude pricing attributed to Keystone XL Pipeline could start as early
15
as 2013 and should apply for 3 to 4 years. The Muse report does not analyze future
16
years beyond 2013 and thus does not include the impact of an oversupplied PADD II
17
market.
18
(II)
PGI has referenced the 2006-2008 period to demonstrate the price discounts which
19
have occurred as a result of an oversupply of Canadian heavy crude. Without
20
Keystone XL Pipeline, these price discounts, which were often much higher than the
21
average of $3 per barrel used in PGI’s benefit calculation, would re-emerge when
22
Canadian heavy crude supply outstrips the requirements of the PADD II refineries.
23
(III)
PGI uses reliable historical public posted prices for Cold Lake Blend at Hardisty.
24
These posted prices have been close to actual prices based on PGI’s experience on
25
its consulting assignments with access to confidential pricing data. When the
26
historical price of Cold Lake Blend is compared with Maya after transportation
27
adjustments to the same market, the Canadian crude has been discounted.
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4 -- Reply Evidence For OH-1-2009
1
(IV)
TransCanada Keystone Pipeline GP Ltd.
PGI has discussed heavy crude pricing at Hardisty using a U.S. Midwest netback
2
basis. The Midwest price for Cold Lake blend should increase to parity with imported
3
Maya at Patoka, Illinois for a period when PADD II needs to import heavy crude via
4
the U.S. Gulf Coast (USGC). For an analysis of the spot price in the Midwest, PGI
5
used the pipeline toll for the incremental heavy barrel, comparable to Cold Lake
6
Blend, and estimated that the Midwest price of Cold Lake Blend would be $3.55 per
7
barrel above the price at the USGC. Muse uses neither the incremental heavy barrel
8
nor the appropriate toll to estimate a Midwest price.
9
(V)
The Muse report does not distinguish between the spot market and term contracts.
10
Canadian producers receive a variety of prices for their crude sales depending on the
11
markets, terms and transportation costs. Producers shipping on Keystone XL Pipeline
12
would expect to receive a higher price in the Midwest by removing a potential future
13
surplus from PADD II and selling the crude at the USGC.
14
(VI)
PGI estimated that the gross benefit to Canadian crude producers from Keystone XL
15
Pipeline could be $1.8 billion to $3.4 billion due to higher heavy crude oil prices and
16
acknowledged that these would be partially offset by costs. Based on the information
17
provided in the Muse report, PGI has now estimated the total costs to be
18
approximately $1.4 billion in 2013 from the Keystone XL Pipeline toll and a price
19
reduction resulting from a potential Enbridge toll increase. The net benefit to
20
Canadian producers would be $0.4 billion to $2.0 billion in 2013. This annual benefit
21
should be sustained and grow with higher production for 3 to 4 years.
.
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TransCanada Keystone Pipeline GP Ltd.
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Reply Evidence For OH-1-2009 -- 5
DISCUSSION
2
The Muse report deals mainly with the Canadian heavy crude price impacts of the Keystone
3
XL Pipeline and the benefits to Canadian crude producers that are referenced in the previous PGI
4
reports. The following discussion is organized as six issues which correspond to the paragraphs in
5
the Summary of this Reply Evidence.
6
PGI submits that there are two important pricing issues in this discussion. These are the
7
timing of pricing changes, and the extent of the ultimate price discount which can be avoided for as
8
long as possible.
9
I. BENEFITS ATTRIBUTABLE TO KEYSTONE XL PIPELINE
10
The Muse report, based on CAPP’s June 2009 Growth scenario, contends that the ongoing
11
expansion of the Enbridge system and the construction of Base Keystone Pipeline will capture much
12
of the benefit that PGI is attributing to Keystone XL Pipeline in 2013. PGI agrees that increased
13
refinery demand may strengthen the market for Canadian heavy crude temporarily. However, the
14
supply of Western Canadian heavy crude oil is forecast to grow over the long term, and without
15
ongoing increases in both pipeline access to refineries and refinery demand, the market will become
16
oversupplied again, and the price of Canadian heavy crude will become weak. Consistent with the
17
Muse view of refinery demand growth in PADD II, and the PGI 2009 supply forecast, PGI expects that
18
the benefits of improved heavy crude pricing attributed to Keystone XL Pipeline could start as early
19
as 2013 and should apply for several years, as noted in the PGI February report, page 29, line 10.
20
During the historical period (2006 to 2008) the Canadian heavy crude market was weak due
21
to an oversupply which had developed as the production of bitumen grew faster than refining capacity
22
in Canada and the northern U.S markets (the traditional markets). As Muse mentions, crude pipeline
23
capacity leaving Western Canada was also constrained. Until 2011, the market is expected to remain
24
weak as growth in bitumen production is expected without a corresponding growth in refining
25
capacity. Although more pipeline capacity will be available once Base Keystone Pipeline and
26
Enbridge expansions come onstream, the additional supply of Canadian heavy crude will likely
27
exceed the growth in refinery demand in the traditional markets in this period.
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In the 2012 to 2013 period, bitumen production is forecast to continue to rise, but refining
2
capacity for Canadian heavy crude should also rise, as pointed out in both the PGI February report
3
(page 21, lines 8-10) and the Muse report (page 9 at bottom). Some of these refinery projects are
4
now believed to be behind their original schedules, and could be delayed further, so the total new
5
refining capacity in PADD II is uncertain. Muse assigns zero probability to the Marathon Detroit
6
project for 2013 (Enbridge IR Response 1.19 (d) to Keystone). If heavy crude demand in the
7
traditional markets exceeds supply, PGI agrees with Muse that prices should strengthen and the
8
discount would disappear until such time as the oversupply returns. However, the continuing growth
9
in Canadian heavy crude supply is expected to cause a PADD II oversupply to return in 2013,
10
causing the price discount to return by then; at the top of page 10 in the Muse report, Muse estimates
11
that the PADD II refinery heavy crude projects could add over 350,000 B/D (55.6 103m3/d) of demand
12
for Canadian heavy crude and observes that this would consume all the supply growth forecast by
13
PGI until 2013. Since the supply would exceed demand in PADD II during 2013, the price would
14
weaken if it were not for the Keystone XL Pipeline volume commitments which would divert Canadian
15
heavy crude from PADD II.
16
Using the CAPP 2009 Growth forecast, Muse observes that heavy crude supply/demand
17
would be in balance until 2014, so an oversupply and price reduction would occur in PADD II by
18
2014. In other words, Canadian heavy crude would likely be discounted in the future when supply
19
exceeds demand; the issue of a future discount is about timing and mitigation of that discount by
20
Keystone XL Pipeline.
21
The benefits attributable to Keystone XL Pipeline should start when PADD II would have
22
excess supply in the absence of Keystone XL Pipeline. The duration of these benefits depends on the
23
rate of growth of Canadian heavy crude. The Keystone XL Pipeline capacity is 500,000 B/D (79.5
24
103m3/d) to the USGC, with 380,000 B/D (60.4 103m3/d) of volume commitments. The forecast heavy
25
crude supply after 2013 in the PGI June report, Table 7B, grows by 380,000 B/D (60.4 103m3/d) in
26
approximately 2 years in the PGI forecast and 3 years in the CAPP Growth forecast. Therefore the
27
volume commitments on the Keystone XL Pipeline would sustain the Midwest price premium on
28
Canadian heavy crude for 2 to 3 years. Then the spot market would shift to the USGC and Keystone
.
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TransCanada Keystone Pipeline GP Ltd.
Reply Evidence For OH-1-2009 -- 7
1
XL Pipeline could deliver another 120,000 B/D (19.2 103m3/d) of uncommitted crude. The forecast
2
heavy crude supply growth after 2013 reaches 500,000 B/D (79.5 103m3/d) in approximately 3 years
3
in the PGI forecast and 4 years in the CAPP Growth forecast, so the capacity of the Keystone XL
4
Pipeline would avoid the historical price discount on Canadian heavy crude for 3 to 4 years.
5
In a discussion at the bottom of page 10, the Muse report uses its Figure 3 to assess the total
6
crude supply/demand balance in PADD II. This includes light crude as indicated by PGI in the ENB
7
IR Response 1.10 (h), so it cannot be used as a basis to forecast heavy crude prices.
8
Long Term
9
In restricting its comments to only 2013, Muse does not reveal its public position about
10
Canadian crude movements to the USGC and Canadian heavy crude pricing at the USGC. In a
11
recent (July 8, 2009) presentation 1, Muse provides the following conclusions regarding the USGC:
12
“There will be a pipeline to the U.S. Gulf Coast, the only uncertainty concerns the
13
timing”, and
14
“Directionally, the prospective market changes are supportive of Canadian heavy
15
crude prices – particularly high-volume access to the U.S. Gulf Coast – Canadian
16
heavy crude pricing will likely evolve to a U.S. Gulf Coast netback basis”
17
PGI and Muse appear to agree that the price of Canadian heavy crude should be at Midwest
18
parity if the Midwest needs the available Canadian crude. Apparently, PGI and Muse can also agree
19
that the Canadian heavy crude price will eventually move to a USGC basis, presumably when that
20
supply exceeds demand in PADD II. PGI and Muse appear to disagree by only one year on when the
21
shift from Midwest parity to USGC parity would occur in the absence of the Keystone XL Pipeline.
22
II. APPLICABILITY OF HISTORICAL PRICE DATA TO THE FUTURE
23
PGI has referenced the 2006-2008 period to demonstrate the price discounts which have
24
occurred as a result of an oversupply of Canadian heavy crude. The Muse report does not dispute
1
Neil Ernest, Muse, Stancil & Co., “Oil Sands Integration with the Global Markets”, TD Newcrest
Conference, July 8, 2009.
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the fact that historical discounts have occurred, but asks why a historical discount on Cold Lake
2
Blend at the USGC might apply in the future (page 7). Taking a long term view, the supply of
3
Canadian crude is expected to rise, albeit at a slower rate than in earlier forecasts. On the market
4
side, there needs to be sufficient refinery demand including pipeline capacity to access the refining
5
markets. Markets, including refinery demand and pipeline capacity to PADD II and PADD III, are
6
expected to grow for a number of years. Without pipeline expansion to handle the growing supplies,
7
pipeline apportionment will occur in the future as it has in the past. The Muse report (page 8 at
8
bottom) states that “apportionment on the crude producers’ desired transportation route inevitably
9
applies downward pressure on the price of Western Canadian crude.”
10
Historical Price Discounts
11
The Muse report refers to a historical discount which was estimated by PGI to have exceeded
12
$5.00 per barrel over 3 years from 2006 to 2008 and a $3.00 per barrel discount from 2008. These
13
estimates are from a period when there was an oversupply of Canadian heavy crude. To be
14
conservative, the $3.00 per barrel discount was assumed for the future in the PGI February report
15
(page 26, line 12) as an avoided discount for Canadian producers resulting from greater access to
16
the market on the Keystone XL Pipeline.
17
The historical discount was estimated from USGC prices by comparing the delivered prices of
18
Cold Lake Blend and Mexican Maya heavy crude. The small quality difference was omitted to simplify
19
the discussion. The actual discount was probably not set at the USGC but is an indicator of an
20
oversupplied PADD II market in which Canadian heavy crude is clearing at a discount. The calculated
21
discount at the USGC provides the magnitude of the discount relative to Maya, a reference crude, at
22
the USGC.
23
Another approach to calculate the same historical discount would be to assume that Cold
24
Lake Blend is sold at the USGC at a price equal to Maya, and to deduct the transportation cost from
25
Hardisty to the USGC to estimate a Hardisty netback price from the USGC. This netback would be
26
higher than the Hardisty posted price and the difference would indicate a discount in the posted price
27
which is equal to the discount shown by PGI at the USGC in Figure 13B of the ENB IR Response
28
1.11. The figure also shows that the discount in the U.S. Midwest market, the largest market for Cold
.
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1
Lake Blend, was even larger relative to Maya, but Maya deliveries to PADD II have been negligible
2
due to the weak Canadian prices, so PGI calculated the discount at the USGC where both crudes
3
were available to refiners.
4
The startup of the Keystone XL Pipeline is planned for late 2012, adding market competition
5
for Canadian crude. By providing more access to the large USGC market for heavy crude, this
6
pipeline should ensure that there is no discount for 3 to 4 years, as discussed earlier.
7
PGI selected the year 2013 to illustrate the magnitude of the impact of removing a
8
conservative $3.00 per barrel price discount, since this would be the first full year of Keystone XL
9
Pipeline operation, on the basis that this pipeline would relieve the oversupply in that year (PGI
10
February report, page 28, lines 8 & 9). The Muse report agrees on page 13 near the top that with
11
sufficient pipeline capacity to move large volumes of Cold Lake Blend to the USGC, there would be
12
no discount as the delivered price would be equal to the Maya price (presumably with a quality
13
adjustment).
14
III. PRICING AT HARDISTY AND U.S. GULF COAST
15
PGI uses historical public posted prices for Cold Lake Blend at Hardisty. Muse advocates the
16
use of Platts spot price assessments of Cold Lake Blend at Hardisty.
17
As discussed in ENB IR 1.11, price postings are available from BP and Flint Hills who are
18
refiners of heavy crude, and EnCana which owns half of WRB Refining. PGI has had confidential
19
access to actual monthly price data for Cold Lake Blend and bitumen as part of its consulting
20
assignments and through its confidential work for clients has found the postings to be a reasonable
21
proxy for actual prices. PGI believes the postings to be an appropriate and reliable public source of
22
price data.
23
In addition, Natural Gas Exchange Inc. (NGX) has price indexes for actual heavy crude
24
trades. The NGX platform has been developed for electronic trading of a variety of Canadian crudes
25
and the historical index represents actual pricing for transactions between buyers and sellers. The
26
NGX index does not include Cold Lake Blend, but it does include Western Canadian Select (WCS), a
27
major heavy crude blend which is blended from Cold Lake Blend, other bitumen and heavy crudes
28
and diluent. NGX reports that its volume of WCS trades averaged approximately 114,000 B/D (18.1
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103m3/d) in 2008; this can be compared with around 250,000 B/D (39.7 103m3/d) of total WCS supply.
2
NGX provides a crude monthly index of WCS – WTI (West Texas Intermediate, at Cushing). The
3
absolute prices of WCS, derived from the NGX index, are shown in Table R1. The NGX derived
4
prices are also compared with the average posted prices of WCS and Platts assessments of WCS in
5
the table. The NGX derived prices of WCS have been much closer to the WCS posted prices than
6
the Platts assessments. The average of the NGX derived prices for WCS in 2008 was $0.08 per
7
barrel higher than the average postings.
8
assessments, the price of Cold Lake Blend has been less than the WCS price. However, since the
9
Cold Lake Blend price tracks that of WCS, and since the posted price of WCS has been near the
10
WCS price derived from NGX, it can be concluded that the posted prices of Cold Lake Blend are a
11
reliable representation of market prices at Hardisty.
Based on both the price postings and the Platts
12
Muse has used Platts spot price assessments which are available to its subscribers. The
13
price comparison in Table R1 attached indicates significant discrepancies between the average
14
posted prices reported by PGI and the Platts spot prices reported by Muse. Over 39 months, the spot
15
price was below the posted price in 13 months, or one third of the time. The price differences ranged
16
from minus $11.90 per barrel to plus $17.33 per barrel. Posted prices are generally set by refiners.
17
Some refiners will pay the posted price to a willing seller. Some are prepared to pay more if
18
necessary. However, the price paid should not be lower than the posted price, as sellers should not
19
have to sell below a price which a refiner is willing to pay.
20
In its Table I, Muse estimates that the average spot price was higher than the average posted
21
price by $1.40 per barrel in 2008. If applicable, this would have raised the spot price of Cold Lake
22
Blend by $1.40 per barrel (although a refiner could have paid the posted price instead) and reduced
23
the discount in 2008 from $3.00 per barrel based on postings to $1.60 per barrel which, nevertheless,
24
is still a discount.
25
Netback Prices from U.S. Gulf Coast
26
The historical price of Cold Lake Blend at the USGC is estimated by PGI based on the
27
historical posted price in Alberta plus the historical pipeline costs from Edmonton. PGI could have
28
used a lower toll from Hardisty instead of from Edmonton, producing a lower price at the USGC, but
.
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1
then the discount would have been higher. At the bottom of page 12, Muse suggests that a future
2
Keystone XL Pipeline toll will set the netback price at Hardisty. PGI agrees that the committed toll
3
would determine the netback price at Hardisty but only for the committed volumes on Keystone XL
4
Pipeline. The Keystone XL Pipeline toll for committed volumes would not set the spot price of
5
Canadian crude volumes which may or may not be shipped on Keystone XL Pipeline. Spot crude
6
shippers would likely ship on Keystone XL Pipeline when the USGC market becomes the spot market
7
or if USGC refiners want to purchase Western Canadian crude for security of supply.
8
9
Muse states in footnote 12, page 12 that a Canadian producer will not sell at a discount to
Maya at the USGC.
As discussed later in Section V, a Canadian producer/marketer has been
10
successful at selling Cold Lake Blend near the Maya price at the USGC. This indicates that buyers
11
needed the crude and were willing to pay a USGC based price, even though the producer/marketer
12
was receiving less at Hardisty for crude sold elsewhere. This difference in the resulting netback
13
prices indicates a discount in the market.
14
For its analysis, Muse selected price data from a single month (March 2007) when the Cold
15
Lake Blend price was discounted $1.50 below the Maya price at the USGC. The table on page 13 of
16
the Muse report shows delivery costs to Houston of $4.21 per barrel in March 2007, increasing to
17
$6.55 per barrel on Keystone XL Pipeline, an increase of $2.04 per barrel. Muse observes that a
18
$2.04 per barrel increase in the pipeline toll would not offset a $1.50 per barrel discount in that
19
month, and concludes at the top of page 14 that PGI greatly overstated the actual historical
20
experience (in the chosen month of March). However, many other months could have been selected
21
when the Cold Lake Blend discount was much higher and the increased toll would have been easily
22
justified. In such a volatile market, PGI would not recommend the use of single month figures for a
23
long term analysis. Based on the elimination of an average $3.00 per barrel discount, the $2.04 per
24
barrel toll increase would be more than offset.
25
In Table II, the Muse report applies its future estimated Keystone XL Pipeline toll to historical
26
deliveries. Since this future estimated toll is higher, the calculated delivered price would be higher
27
without a reduction in the Alberta netback price, and the discount would be lower relative to Maya. In
28
Table III, Muse uses its still higher estimate of a spot pipeline toll and concludes that the discount
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1
would be still lower. The future tolls should not be applied to historical prices and do not reflect actual
2
historical experience. As explained earlier, a conservative estimate of the historical discount of $3.00
3
per barrel was used by PGI to calculate the benefit from avoiding a historical discount; the use of
4
future pipeline tolls is unrelated to the historical price analysis.
5
IV. MIDWEST PRICING AND NETBACKS
6
PGI has used Maya heavy crude as a reference crude for the Midwest market in order to
7
determine a market value for Cold Lake Blend in that market, consistent with the USGC analysis of
8
heavy crude pricing. In our assessment of spot pricing in markets, the incremental barrel, or last
9
barrel, is the barrel that sets the spot price. The delivery cost of Maya by pipeline from the USGC to
10
Patoka was estimated from available pipeline tolls. PGI used the Amoco Capline toll since the lowest
11
available toll (that of Plains) is more likely to transport the first barrel than the last barrel.
12
The pipeline tolls to deliver heavy crude from the USGC to Patoka are shown in ENB IR
13
Response 1.13. Five options are shown including four from undivided interests in the Capline
14
pipeline. The undivided interest owners of Capline include Marathon with approximately 37 percent,
15
Plains with approximately 22 percent, Southcap with approximately 21 percent and Amoco Capline
16
with approximately 20 percent. The Capline pipeline has a total crude capacity around 1 million
17
barrels per day (159 103m3/d) and carries mostly light crude to the refining markets which it supplies
18
from Tennessee and Illinois. The Amoco Capline heavy crude toll used by PGI is slightly below the
19
average of the four Capline tolls and also below the Cushing route.
20
Muse suggests using the Plains pipeline toll since it is lowest of all the available tolls. The
21
selection would depend on the volume to be shipped versus the capacity utilization of each owner.
22
With the lowest tolls for both light and heavy crudes, Plains may sell its space first for light crude as
23
well as heavy; if Plains is sold out, shippers would have to use other space. As noted by Muse, some
24
of the pipeline owners also have affiliated refineries in PADD II, so they could use their own space
25
first for light and/or heavy crudes. However, there are many refiners in the Midwest, such as CITGO,
26
ExxonMobil, Flint Hills and Valero, who do not own pipeline space from the USGC and must pay third
27
parties for transportation. Also, Southcap is owned by Chevron, Shell and Marathon; the first two
28
majority owners do not have refining affiliates in PADD II, so indirectly through Southcap, Chevron
.
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1
and Shell provide independent pipeline services to PADD II, like Plains pipeline. The Southcap toll for
2
heavy crude is higher than the Plains and Amoco Capline tolls.
3
PGI uses Maya as a proxy for international crudes since production and imports by the U.S
4
are large, and since ongoing pricing is available. PGI monitors the Maya price and estimates its
5
refining value on an ongoing basis. If another heavy crude were to be used as a reference crude, it
6
would have to be a major crude in the market and a public source of ongoing prices would be
7
needed. Muse suggests using a blend of Maya and Mars (a lighter crude) because they say “some
8
refiner” ships it. A significant quality adjustment would be needed between Cold Lake Blend and this
9
light/heavy blend. Since not all refineries would use this blend, PGI does not use this approach for
10
pricing of incremental crudes in the market.
11
Muse asserts that PGI has overstated the Midwestern pricing potential relative to the USGC.
12
PGI added $3.55 per barrel for Canadian heavy crude at Patoka versus the USGC. However, the
13
main heavy crude refinery at Wood River near Patoka is likely to receive most of its heavy crude from
14
Canada via Base Keystone Pipeline. The other large heavy crude refinery project is near Chicago, so
15
Chicago parity might be used instead. This would add another $1.95 per barrel to Canadian heavy
16
crude due to the addition of the $0.59 per barrel toll for Maya on the Chicap pipeline from Patoka to
17
Chicago, and the avoidance of the $1.36 per barrel toll for shipping Canadian heavy crude on the
18
Mustang pipeline from Chicago to Patoka. This would increase the Midwest premium to $5.50 per
19
barrel over the USGC price.
20
Consistent with the Enbridge evidence, Muse indicates that the withdrawal of 380,000 B/D
21
(60.4 103m3/d) would increase the Enbridge tolls to Chicago by about $0.65 per barrel in 2013. This
22
would not affect the Midwest prices but would reduce netback prices in Western Canada. In the PGI
23
February report (page 29, line 2), PGI acknowledged potential impacts on crude oil netback prices
24
from toll changes on other pipelines. PGI has used the toll increase from the Muse report to quantify
25
the impact later in Section VI of this Reply Evidence.
26
V. PRICE DIFFERENTIATION
27
The Muse report does not distinguish between the spot market and term contracts. Muse
28
states that “there is only one price at Hardisty for a given grade of crude oil” (page 16). This should
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1
be true for the spot price of a crude but does not include netback prices for the same crude which is
2
purchased and/or transported under term contracts. As discussed earlier, crudes can be purchased
3
at postings or related to postings. In the case of Keystone XL Pipeline, committed shippers may be
4
producers and/or refiners. They can reasonably expect to sell or receive the delivered crude at the
5
USGC at a competitive market price. They have committed to pay a known pipeline toll for a certain
6
volume on a ship-or-pay basis for a period of time. In this case, the netback price in Alberta for the
7
committed volumes would likely be the USGC spot price minus transportation costs.
8
The Muse report contradicts itself on page 12, footnote 12, where it says that “any Canadian
9
crude ... transported ... to the USGC will not sell at a discount to its market value ... on the USGC.”
10
Based on the pipeline tolls from Hardisty to the USGC, this would result in a higher netback price
11
than the spot price at Hardisty.
12
A producer/marketer of Cold Lake Blend has reported different historical netback prices at
13
Hardisty. In FERC testimony2, CNRL has reported that it received two different prices for Cold Lake
14
Blend in the first 10 months of 2007. In the testimony, CNRL reports that for this period, it received
15
an average price of $55.88 per barrel for Cold Lake Blend delivered to the USGC on Pegasus
16
pipeline, resulting in a netback price of $51.95 per barrel after deducting the cost of transportation.
17
For the same period, the average netback value for Cold Lake Blend sold to the Upper Midwest was
18
$46.73 per barrel. PGI notes that this represents a discount of $5.22 per barrel in the netback price
19
for Cold Lake Blend which was sold to the Upper Midwest for that time period.
20
Netback prices on the Keystone and Keystone XL Pipelines to Wood River, Patoka, Cushing
21
and the USGC could all be unique. They would be based on competitive pricing at the destinations
22
minus the tolls for committed shippers.
23
The netback prices of committed volumes would most likely be different than the netback
24
price for spot crude which is determined in the clearing market. In this case, the Midwest is assumed
2
Testimony to FERC, Docket OR07-21, Exhibit No. SCN-10 Public Version, July 18, 2008,
Bryan Bradley, Manager, Crude Oil Marketing, Canadian Natural Resources Limited (CNRL)
.
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1
to be the clearing market when Keystone XL Pipeline starts up. The committed volumes on Keystone
2
XL Pipeline are not candidates for the clearing market.
3
Pricing Strategies
4
For a Canadian crude producer, a commitment to ship on Keystone XL Pipeline to the USGC
5
can be a straightforward commercial decision. The producer knows the pipeline toll, so knows the
6
netback price relative to the USGC price. Agreeing to ship a fixed volume to the USGC would remove
7
that volume from the incremental spot market in PADD II. The Midwest spot market would provide a
8
higher netback price since the availability of spot barrels would be less than demand for a number of
9
years. The average netback price would increase.
10
A USGC refiner who receives crude at Hardisty to ship on Keystone XL Pipeline would decide
11
what price to pay relative to other crudes at Hardisty, so must arrange for supplies in advance. In its
12
evidence (page 4, line 12), Valero, a USGC refiner with commitments on Keystone XL Pipeline, has
13
indicated that it “has secured commitments from several Canadian oil producers to sell (to Valero)
14
heavy crude oil for shipment through Keystone XL Pipeline.”
15
including pricing and PGI has no knowledge of Valero’s pricing. However, other Canadian crude
16
producers would likely see the same value proposition as the producer described above, so would
17
agree to sell a fixed volume at a suitable price to a USGC refiner in order to strengthen the average
18
price. Some USGC refiners need more heavy crude supplies and can secure volumes on Keystone
19
XL Pipeline; they may be willing to pay a premium over Maya to secure supply, although PGI has not
20
included such a benefit to producers.
No contract details are available
21
Refiners who operate only in PADD II are not likely to be committed shippers on Keystone XL
22
Pipeline. Refiners in both PADD II and PADD III could secure Canadian heavy crude supply for the
23
USGC and accept that they will pay different prices which provide competitive delivered costs in each
24
refinery location. The volumes to the USGC would have to be committed as above, and prices for the
25
Midwest could be term or spot prices. Assuming the netback price at Hardisty for committed volumes
26
from the USGC is lower than the spot price from PADD II, the refiner cannot necessarily bring down
27
the spot price because crude producers are free to sell to others at the higher spot price.
Adobe Page 33 of 37
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16 -- Reply Evidence For OH-1-2009
TransCanada Keystone Pipeline GP Ltd.
1
Pricing Example
2
An illustrative comparison of prices of Cold Lake Blend is provided in the following table
3
relative to an assumed Maya price of $50.00 per barrel at the USGC. Based on the 2008 price
4
discount and transportation costs, the Cold Lake Blend netback price would have been $42.41 per
5
barrel at Hardisty. At USGC parity (without the historical discount) and with the current transportation
6
cost, the netback price would be higher at $44.39 per barrel. Using the higher Keystone XL Pipeline
7
toll for committed shippers assumed by Muse, the netback price would fall slightly to $43.75 per
8
barrel, but would be known to the producer and would be higher than the historical 2008 price by
9
avoiding the $3.00 per barrel discount. Since the Midwest price would rise at Patoka, the netback
10
from Patoka would be much higher ($47.29 per barrel), even when a price reduction of $0.65 per
11
barrel due to a potential Enbridge toll increase is taken into account. In this example, if a producer
12
commits to ship 30 percent on Keystone XL Pipeline and sells 70 percent into the Midwest spot
13
market, the average netback price would be $46.23 per barrel. This would be $3.82 per barrel higher
14
than the netback price of $42.41 per barrel using the historical discount.
ILLUSTRATIVE HEAVY CRUDE PRICE RELATIONSHIPS
(U.S. Dollars per Barrel)
Historical
USGC
Discount
Maya Crude
USGC Price
Pipeline toll to Patoka
Patoka Price
USGC Parity
(1)
Current
(2)
Committed
50.00
50.00
50.00
3.00
47.00
1.28
45.72
0.00
50.00
1.28
48.72
0.00
50.00
Weighted
Average
CLB Netback
Patoka Parity
No
Enbridge
discount
discount
50.00
2.27
52.27
50.00
2.27
52.27
52.27
52.27
50.00
(3)
Cold Lake Blend
USGC Discount
USGC Price
Pipeline toll from Patoka
Patoka Price
Pipeline toll from Edmonton to USGC
Pipeline toll from Edmonton to Patoka
Edmonton Netback Price
6.25
3.31
42.41
(4)
4.33
44.39
(6)
(5)
43.75
CLB Weighted Average Netback
(6)
30% committed/70% Patoka netback
4.33
47.94
(5)
4.98
47.29
(7)
46.23
(8)
Notes:
(1) 2008
(2) With zero discount
(3) Maya and Cold Lake Blend assumed to have equal value (i.e. no quality adjustment)
(4) Estimated Average 2008 transportation cost = $4.59/B - $1.28/B
(5) Estimated current 2009 transportation cost = $5.65/B - $1.28/B
(6) Keystone committed toll per Muse
(7) Current cost + $0.65 per barrel per Muse
(8) Assumes 30% Committed USGC netback & 70% Patoka netback after Enbridge loss
.
Adobe Page 34 of 37
TransCanada Keystone Pipeline GP Ltd.
Reply Evidence For OH-1-2009 -- 17
1
After a period of Midwest (Patoka) parity, an excess of Canadian heavy crude should lead to
2
USGC parity. The Keystone XL Pipeline toll for uncommitted shippers will likely be higher than the toll
3
for committed shippers, so the netback price from the USGC market will be higher for committed
4
shippers in the long term.
5
The Muse “simple test” for reasonableness (which is repeated in its Summary) does not
6
apply. Without the Keystone XL Pipeline, the Midwest premium would become illusive. A producer
7
who supplies a committed volume on the Keystone XL Pipeline may expect to receive a lower
8
netback price on this volume, but this strategy would be intended to raise the price in PADD II and
9
raise the average netback price. Longer term, when the USGC becomes the spot market, the
10
committed shippers will also benefit.
11
VI. KEYSTONE XL PIPELINE BENEFIT ANALYSIS
12
In its report, PGI identified the magnitude of the major price drivers for transparency and to
13
ensure that none have been overlooked. PGI estimated that the gross benefit to Canadian crude
14
producers from Keystone XL Pipeline could be $1.8 to $3.4 billion in 2013 based on heavy crude
15
price increases in Canadian heavy crude and identified that there would be additional pipeline costs
16
which partially offset the benefits (PGI February report, page 29, line 2).
17
The Muse report estimates a positive net benefit to producers of $102 million in 2013. The
18
Muse estimate is based on the CAPP 2009 Growth forecast which is lower than the PGI 2009
19
forecast.
20
Canadian heavy crude production until 2014, so “the Midwest can act as the price setting location in
21
2013, only because of the previous construction of Base Keystone and the Enbridge system
22
expansion.” (page 10) In summary, Muse estimates that the positive net benefit in 2013 is small
23
because its PADD II crude balance without Keystone XL Pipeline is not oversupplied in that year.
Muse indicated that refinery projects in PADD II could consume all of the incremental
24
After the Keystone XL Pipeline startup, there will be a cost related to the Keystone XL
25
Pipeline toll. The Keystone XL Pipeline shippers must pay an agreed toll for the transportation
26
service. Muse has assumed a $6.25 per barrel toll from a pro forma table. On this basis, the total cost
27
for the committed volume of 380,000 B/D (60.4 103m3/d) would be $867 million per year. This would
Adobe Page 35 of 37
.
18 -- Reply Evidence For OH-1-2009
TransCanada Keystone Pipeline GP Ltd.
1
be paid by committed shippers for the committed volumes. It would not be paid for other volumes
2
transported for the same shippers on Keystone XL Pipeline or by other Canadian crude producers.
3
In addition, Muse has used a potential toll increase of $0.65 per barrel on the Enbridge
4
system which is from the Enbridge estimated impact of the Keystone XL Pipeline. This extra cost
5
would not affect Midwest prices but would reduce the netback price and affect prices on all the
6
crudes in Western Canada except term volumes that are shipped with committed tolls on contracted
7
pipelines. In addition to the committed volumes on Keystone XL Pipeline, there will be 530,000 B/D
8
(84.3 103m3/d) of committed volume on Base Keystone Pipeline, so the total committed volume will
9
be 910,000 B/D (145 103m3/d). This excludes any committed volumes on the Express pipeline. The
10
PGI 2009 forecast of total crude supply in 2013 is 3.032 million B/D (482 103m3/d) (PGI June report,
11
Table 2B), so by difference, the uncommitted barrels would be 2.122 million B/D (337 103m3/d). Using
12
a netback price reduction of $0.65 per barrel, the cost to producers would be $503 million in 2013.
13
Based on the costs above, the total cost related to pipeline toll impacts would be
14
approximately $1.37 billion in 2013. Deducting this cost from the gross benefit of $1.8 billion to $3.4
15
billion discussed previously, the net benefit to Canadian crude producers would be approximately
16
$0.4 billion to $2.0 billion in 2013. Since the supply volumes are forecast to increase each year, both
17
the gross benefit and the net benefit should rise each year for 3 to 4 years.
.
Adobe Page 36 of 37
TransCanada Keystone Pipeline GP Ltd.
Reply Evidence For OH-1-2009 -- 19
TABLE R1
COMPARISON OF NGX, POSTINGS & PLATTS PRICING AT HARDISTY
(U.S. Dollars per Barrel)
NGX
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Average:
2006 (9 mos)
2007
2008
2009 (6 mos)
Apr 2006-2008
Apr 2006-Jun 2009
SOURCE
Postings (2)
(1)
WCS
Cold
Lake
Blend
WCS
38.72
28.72
36.77
52.02
57.29
51.63
57.93
55.83
41.56
36.90
39.17
43.90
38.05
44.43
45.60
44.03
46.33
47.19
53.06
52.72
52.96
54.29
66.29
50.02
68.72
71.75
88.87
94.64
104.28
108.15
114.39
101.12
83.87
58.08
37.54
24.43
29.97
31.71
40.76
43.76
51.51
61.18
37.75
28.59
35.55
49.94
55.93
51.09
57.34
55.08
41.04
35.49
37.66
41.92
35.85
41.89
43.58
41.60
44.42
45.76
50.35
51.13
51.28
52.79
63.47
46.89
65.89
68.95
86.95
92.80
101.92
106.16
112.75
98.74
81.60
56.25
35.40
21.03
28.33
30.57
39.42
42.58
50.60
60.42
38.91
28.86
36.54
50.83
56.93
51.72
57.85
55.76
41.55
36.57
38.33
42.98
37.18
43.34
45.16
43.06
45.94
47.14
52.22
52.72
53.03
54.66
66.42
50.05
68.59
71.31
89.02
94.60
104.03
108.21
114.86
101.24
84.03
58.35
37.49
23.17
29.94
31.72
40.37
43.63
51.62
61.17
48.47
49.58
79.65
43.15
47.28
47.42
77.37
41.98
60.21
57.59
58.27
55.77
Platts
(CLB
WCS)
(3)
(CLB
WCS)
CLB
(Platts
Posting)
COMPARISON
WCS
(Platts
(Platts
Posting)
NTP)
Cold
Lake
Blend
(NGX
Posting)
WCS
(1.16)
(0.26)
(0.99)
(0.90)
(1.00)
(0.63)
(0.51)
(0.68)
(0.51)
(1.08)
(0.67)
(1.06)
(1.33)
(1.45)
(1.58)
(1.46)
(1.52)
(1.38)
(1.87)
(1.59)
(1.76)
(1.87)
(2.94)
(3.16)
(2.70)
(2.36)
(2.08)
(1.80)
(2.11)
(2.04)
(2.10)
(2.50)
(2.43)
(2.10)
(2.08)
(2.15)
(1.61)
(1.15)
(0.95)
(1.05)
(1.02)
(0.75)
56.61
54.36
54.99
58.30
51.77
42.08
40.22
42.11
45.93
39.96
43.58
43.80
47.21
43.42
47.02
51.95
45.01
46.99
51.31
51.57
64.22
68.22
76.46
84.18
86.58
97.83
113.47
115.28
94.57
82.07
53.72
39.33
33.47
38.29
36.06
42.14
43.55
51.03
59.67
56.91
54.74
55.22
58.60
52.02
42.42
40.50
42.53
46.76
40.80
44.69
44.86
48.36
44.68
48.23
53.11
46.33
48.85
54.26
54.87
66.67
70.33
78.00
85.74
88.62
99.61
114.93
117.08
96.56
84.11
55.64
41.23
35.14
39.50
37.06
43.14
44.50
51.76
60.33
(0.30)
(0.38)
(0.23)
(0.30)
(0.25)
(0.34)
(0.28)
(0.42)
(0.83)
(0.84)
(1.11)
(1.06)
(1.15)
(1.26)
(1.21)
(1.16)
(1.32)
(1.86)
(2.95)
(3.30)
(2.45)
(2.11)
(1.54)
(1.56)
(2.04)
(1.78)
(1.46)
(1.80)
(1.99)
(2.04)
(1.92)
(1.90)
(1.67)
(1.21)
(1.00)
(1.00)
(0.95)
(0.73)
(0.66)
6.67
(1.57)
3.90
0.96
(3.31)
1.04
4.73
4.45
4.01
4.11
1.69
0.22
5.61
(1.00)
1.26
1.60
(6.12)
(4.29)
(1.48)
(11.90)
17.33
2.33
7.51
(2.77)
(6.22)
(4.09)
7.31
2.53
(4.17)
0.47
(2.53)
3.93
12.44
9.96
5.49
2.72
0.97
0.43
(0.75)
6.08
(2.19)
3.50
0.75
(3.74)
0.87
3.93
4.20
3.78
3.62
1.35
(0.30)
5.30
(1.26)
1.09
0.89
(6.39)
(4.18)
(0.40)
(11.55)
16.62
1.74
6.69
(3.28)
(5.98)
(4.42)
6.72
2.22
(4.68)
0.08
(2.71)
3.74
11.97
9.56
5.34
2.77
0.87
0.14
(0.84)
4.89
(2.55)
3.59
0.67
(3.81)
0.86
3.60
3.36
2.86
2.75
0.26
(0.74)
4.33
(1.65)
1.04
0.05
(6.39)
(4.11)
(0.02)
(11.42)
16.65
1.61
6.25
(3.13)
(6.02)
(4.67)
6.78
2.69
(4.56)
0.24
(2.44)
3.69
10.71
9.53
5.35
2.38
0.74
0.25
(0.85)
(0.19)
(0.14)
0.23
1.19
0.36
(0.09)
0.08
0.07
0.01
0.32
0.84
0.91
0.87
1.09
0.44
0.97
0.39
0.05
0.84
0.00
(0.07)
(0.38)
(0.13)
(0.02)
0.13
0.44
(0.15)
0.04
0.25
(0.06)
(0.46)
(0.12)
(0.15)
(0.26)
0.05
1.26
0.04
(0.01)
0.39
0.13
(0.10)
0.00
48.06
49.24
79.57
43.07
(0.78)
(1.83)
(2.20)
(1.09)
49.60
48.00
78.77
45.12
49.97
49.64
80.58
46.05
(0.37)
(1.64)
(1.82)
(0.92)
2.32
0.59
1.39
3.14
1.91
0.40
1.01
2.98
1.50
0.06
0.93
2.90
0.41
0.34
0.08
0.08
59.95
57.35
(1.68)
(1.59)
59.62
57.39
60.98
58.68
(1.36)
(1.29)
1.35
1.63
1.03
1.33
0.77
1.10
0.26
0.23
Notes: (1) Derived from Natural Gas Exchange Inc. (NGX) Crude Monthly Index: WCS-WTI
Notes: (2) PGI average of 3 postings
Notes: (3) Platts spot price assessment
Adobe Page 37 of 37
.