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A shutdown of Enbridge's Line 5 could create a logistical
scramble for both North American crude producers and the refiners
that transform the raw material into key consumer fuels. Crude
producers in western Canada and the Bakken would lose a significant
pipeline route and would face lower netbacks as their crude was
forced to more distant markets via more expensive modes of
transportation such as rail or truck. Refiners that rely on
deliveries via Line 5 would face higher costs relative to their
competitors, potentially threatening their economic viability.
On 13 November 2020, Michigan governor Gretchen Whitmer filed a
legal action seeking the closure of Enbridge's Line 5, by 12 May
2021. At issue is the potential for a spill as the pipeline crosses
the Great Lakes through the Straits of Mackinac, a major
transportation route connecting Lake Michigan and Lake Huron. Line
5 runs from Superior, Wisconsin to Sarnia, Ontario, and together
with Line 78 forms a critical part of the Enbridge Mainline system
out of western Canada. Line 5, which typically runs full, has the
capacity to ship about 540,000 b/d of light crude and natural gas
liquids (NGLs) to refineries in Detroit, Michigan; Toledo, Ohio;
Warren, Pennsylvania; and Ontario and provides crude oil
interconnections to Montreal, Quebec.
Enbridge has filed a complaint seeking an injunction to prevent
the shutdown, stating that pipeline regulation is a US federal
matter, and not a state one. Despite the 12 May deadline, the case
could continue to wind its way through the court system for the
foreseeable future, depending on legal developments. Enbridge has
also been advancing a separate project to bury the Strait of
Mackinac pipeline crossing in a tunnel 100 feet below bedrock,
although that project, if fully approved, would not be completed
until late 2024.
What would be the impact of a Line 5 shut down? Mainline
capacity beyond Superior, excluding Line 5, is just under 2 million
b/d. US Federal Energy Regulatory Commission (FERC) data indicate
that Mainline deliveries beyond Superior have regularly exceeded
this level. It is therefore unlikely the full volume of crude oil
that moves on Line 5 would be able to clear the market on the
Mainline system in the event of a shutdown. Netting out the
75,000-85,000 b/d of NGLs transported by Line 5, more than 400,000
b/d of crude would need to find alternative markets or modes of
transportation.
Moreover, effectively all western Canadian and Bakken crude oil
grades would lose some degree of market access via pipeline, not
just the light crude that moves on Line 5. This is because with
Line 5 shut, refineries formerly served by it would nominate
shipments on Line 78, almost doubling demand for Line 78 space. As
part of Enbridge's common carrier Mainline system, Line 78 would
have to be apportioned dramatically, reducing access to all
refineries proportionally.
Other pipelines that ship Canadian and Bakken grades to the US
Midwest are effectively at capacity, and a permanent shutdown of
Line 5 could increase the call on crude-by-rail shipments from
western Canada and the Bakken. If the displaced crude cannot access
the market via pipeline and/or must travel farther afield, crude
oil producers could see their netback prices decline in order to
clear the market.
What about the refining sector in the affected markets? There
are nine refineries served by the Line 5/78 system with collective
crude oil distillation capacity of more than 1 million b/d; these
plants produce over 400,000 b/d of gasoline, 200,000 b/d of diesel
and 150,000 b/d of jet fuel. Some of these refineries have access
to other pipeline systems that would mitigate their supply impacts
to some degree from a Line 5 shutdown, but others would lose a
substantial portion of pipelined supply. The refiners impacted by a
Line 5 closure would have to decide to operate at reduced rates or
source crude oil using more costly transportation mechanisms. Some
refineries would likely fall to a competitive disadvantage relative
to refineries in their market still able to receive their full
crude slate by pipeline.
Access IHS Markit's full report, The threat of Enbridge
Line 5 shutdown looms, via the link on the right side of this
page.
Posted 07 May 2021 by Aaron Brady, Vice President, Energy Oil Market Services, S&P Global Commodity Insights and
Susan D Bell, Associate Director, Americas Refining & Marketing, S&P Global Commodity Insights
