Canada pipeline tariff hike hurting chems - analyst

01 December 2006 18:45  [Source: ICIS news]

TORONTO (ICIS news)--A planned sharp increase in the tariffs for feedstock shipments on Canada's Cochin pipeline is set to add to the woes of Ontario’s petrochemicals hub in Sarnia, a top Canadian chemicals analyst said on Friday.

The 1,900-mile Cochin pipeline transports ethane, natural gas liquids and other feedstocks from Alberta to Sarnia.

BP, which operates Cochin through subsidiaries, said it has applied to energy regulators in Canada and the US to increase tariffs to help pay for testing and upgrading the line. The tariff hikes would be effective on 1 January, BP said.

Tariffs on the line’s western leg, from Fort Saskatchewan in Alberta to Iowa City in the US, would go up by 3 cents/gal. On the eastern leg, from Iowa City to Sarnia, BP applied for a 7 cent/gal increase.

"The proposed increase in the tariff is substantial," John Cummings, a Toronto-based independent petrochemicals analyst, said in a research note to clients, adding that it would hurt the profitability of Sarnia-based ethylene and derivatives production.

The increases do not cover expenditures required for upgrading the line to resume ethylene shipments, which BP suspended earlier this year citing safety reasons.

Cummings said BP is taking a cautious approach in testing the whole line because of the recent problems it had at its Texas refinery and with a pipeline in Alaska. “The last thing the company wants is a leak and fire on the Cochin line close to a populated area, for example near Detroit,” he said.

A spokesman for ExxonMobil’s Canadian affiliate Imperial Oil told ICIS news that the rate hike may impact the company’s petrochemicals business in Sarnia. However, he stressed that Imperial is able to obtain alternative feedstock and ethylene through the ExxonMobil network to support its Sarnia chemicals plants.

Nova Chemicals expects any direct impact on it to be minimal as it hardly use the line any longer, it said in a brief statement. “We will be interested to see any market impacts that may result from this tariff increase,” the Calgary-based petrochemicals major added.

Whether BP can successfully realise the rate hike remains to be seen, Cummings said.

A key factor will be the long-term availability of surplus ethane in Alberta as shippers on the Cochin line are required to commit to long-term contracts and tariffs, Cummings said. 

The Sarnia petrochemicals site suffered a significant blow this year when Dow Chemical announced plans to close all its chemical manufacturing facilities there by the end of 2008, citing lack of feedstock following BP’s suspension of ethylene shipment on the Cochin pipeline.

By: Stefan Baumgarten
+1 713 525 2653

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