Canadian report examines need for more oil pipeline capacity

April 4, 2005
The Canadian Association of Oil Producers (CAPP) has assessed the need for additional oil pipeline capacity in a report released in February "Crude Oil Pipeline Expansion Summary."

The Canadian Association of Oil Producers (CAPP) has assessed the need for additional oil pipeline capacity in a report released in February "Crude Oil Pipeline Expansion Summary." The report examines the association's needs in light of forecast supply growth and the changing mix of crude oil types.

The report's key focus is on the need for new pipeline capacity to move crude to markets, the need for expanded markets, and the importance of timely expansion. The consequences of pipeline expansions lagging the crude supply growth, says CAPP, are significant and not acceptable. The report also discusses obstacles to timely expansion.

Expansion needed

Because of Alberta's vast oil sands resources, western Canadian crude oil production and supply have experienced record levels of growth. The CAPP report says production from oil sands exceeded 1 million b/d in late 2003, and that means Canada's pipeline infrastructure must expand to keep pace.

Since the late 1990s, pipeline capacity out of western Canada has increased by about 550,000 b/d. According to the report, over the next 10 years about 600,000 b/d of additional pipeline capacity will be required to deliver new crude supplies to market. Over the past 2 years, CAPP has been working with producers to address new pipeline capacity out of western Canada.

In 2003, CAPP contracted Muse Stancil & Co., an Addison, Tex.-based consultant, to prepare a comprehensive analysis of CAPP's production and supply forecast, potential markets for the new supply growth, and which generic pipeline routes could be developed to reach desired crude markets. The study entitled "Western Canadian Crude Oil Supply and Markets, 2002-2010" was released in fall 2003. The executive summary for the Muse report is available on the CAPP website (

Subsequent to the Muse Stancil study, CAPP extended its crude oil forecast of production to 2015 from 2010. The longer planning horizon offers additional insights into the longer-term pipeline requirements and options.

This report reviews the production and supply forecasts, the existing crude oil pipeline infrastructure, opportunities for new market development, requirements for new pipeline capacity, and tolling options for pipeline development.

Crude production, supply: 2004-15

According to CAPP's report, Western Canadian crude oil production will be just short of 3.0 million b/d by 2010 and reach 3.3 million b/d by 2015. That represents about a 50% increase in production, or about 1.0 million b/d over the next decade.

The maturing conventional reserve base in western Canada is in decline. Light sweet production is declining on average by 5%/year. Conventional heavy production, says CAPP, has shown some resilience in recent years, but it is also expected to decline at a rate of about 5%/year.

By 2015, the report says, three quarters of western Canada's production will be from the oil sands.

CAPP's report says western Canada's crude slate has been dominated by light and heavy crudes over the last 15 years, but there will now be a shift. Heavy crude oil production, including bitumen from oil sands, traditionally has relied on condensate as the diluent to reduce viscosity and meet pipeline specifications for transport. The primary source of condensate has been pentanes from natural gas production. Heavy crude oil and bitumen blended with condensate are generally referred to as "Dilbit blends."

A recent shift to production of drier gas with less C5+ along with other demands for NGL has tightened condensate supplies. Producers are looking at other options.

As a replacement for condensate, says CAPP, producers are starting to use light synthetic crude oil as an alternative diluent for blending to pipeline viscosity requirements. This trend to use synthetic crude has led to the evolution of a synthetic-bitumen blend referred to as "Synbit."

As a result of this blending trend, Western Canada crude will no longer be predominantly light and heavy. The report forecasts medium-like crudes to become an important component of the overall crude slate available for refiners.


Options to blend synthetic with bitumen create opportunities for producers to custom-blend crudes to match refinery configurations. An example of a 60:40 mix of synthetic and bitumen produces a medium sour-like crude that looks a lot like a conventional medium sour with about the same refining cuts of light ends, naphtha, distillate, vacuum gas oil (VGO), and resid.

Dilbit and Synbit blends, says the report, have certain advantages over competing crudes, such as Mexican Maya. For example, a Synbit blend has significantly less sulfur/bbl.

Existing capacity, new requirements

Currently, crude oil produced from Western Canada moves to market via three major pipeline systems: Enbridge Pipelines Inc., Terasen Express, and Terasen Trans Mountain. Each of these lines provides a link into the North American market.

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The report refers to the US Petroleum Administration for Defense Districts (PADDs) and the relationships the pipelines have to the separate divisions. Fig. 1 shows PADD areas in the US.

In aggregate, Western Canada has sufficient pipeline capacity to move crude oil to markets for the next several years. According to the report, the total excess capacity across the three major trunkline systems leaving Western Canada is about 300,000 b/d.

The majority of Western Canada's crude oil supply continues to be sold into eastern markets, primarily in the US Midwest. These primary market areas are accessed through the Enbridge pipeline system. Crude oil shipped to secondary markets, such as cargoes shipped off the West Coast, generally arises after the available capacity on the Enbridge system is fully subscribed, i.e., the Enbridge system is in apportionment.

The distinction between primary and secondary markets is important in assessing future pipeline capacity requirements. From a planning perspective, says the report, adequate pipeline capacity out of Western Canada is defined as "sufficient space to avoid sustained apportionment on the Enbridge system."

A comparison of the forecast growth in crude oil production and supply vs. available Enbridge pipeline capacity shows a potential shortfall as early as 2007-08. At that time, Enbridge will be apportioned, thus displacing barrels into secondary markets.

CAPP says to accommodate this near-term shortfall in capacity on Enbridge, small-scale expansion and debottlenecking options are available for the Enbridge system to boost capacity by about 150,000 b/d. Other pipelines also have potential to implement small system expansions. Overall, the report says these capacity increases should provide sufficient aggregate pipeline capacity until 2010-11.

The production forecast for light crude oil and equivalent (synthetic) shows significant growth. The combination, however, of declining conventional light oil production and synthetic supplies shipped as diluent in heavy crudes (Synbit) tends to mitigate the net growth in supply so that existing light oil pipeline capacity will be sufficient until 2015.

CAPP feels the future increases in pipeline capacity are required primarily to accommodate growth of new supplies of Synbit and Dilbit, i.e., medium sour and heavy crudes.

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The near-term shortfall in capacity is being dealt with through a number of system upgrades and downstream expansions. In particular, early phases of the Enbridge Southern Access project provide options to expand capacity by 2007-08 (Fig. 2).

Another pipeline project announced is by Koch Pipeline Co. LP, which is investigating options to twin and expand its takeoff line at Clearbrook, Minn., that connects the Enbridge system to the Flint Hills and Marathon refineries near St. Paul, Minn. The Koch pipeline option takes crude out of the Enbridge system at Clearbrook, thus leaving more space available downstream to reach PADD II markets.

Over the next decade, says the report, about 600,000 b/d of new pipeline capacity may be needed. As noted above, the report says the first part of this increase can come through debottlenecking projects and minor expansions to existing systems.

For a new pipeline project to be economic, the required throughput capacity is about 400-450,000 b/d. But building a new pipeline is a significant task, says the report, requiring about 5 years to complete. Thus, for a 2010-11 completion, new projects must start planning now.

Potential markets, pipeline routes

Canadian crude oil has historically been consumed in five market areas: the prairie provinces, Ontario, British Columbia-Washington State, US Rocky Mountains, and US Midwest.

In 2003, says CAPP, these core market areas represented an aggregate demand of more than 3.0 million b/d. The demand in these traditional core markets, however, has been for predominantly light and heavy crudes, reflecting the composition of the historical crude slate developed and supplied by producers.

In addition to these core markets, crude oil supplies also are occasionally delivered into extended markets, the Lower Midwest (PADD II) and Washington State (PADD V) regions.

Much of the demand in the extended markets is for light and medium sour crudes. Historically, Western Canada has not produced large volumes of medium crudes, says the report, but the potential demand for medium crudes in these markets offers significant opportunities related to the growing supplies of oil sands Synbit, which can be blended to resemble a medium crude.

According to CAPP's report, Western Canada's growth in crude oil supply will be about 1.0 million b/d over the next decade. The extended market area represents about 2.0 million b/d of demand.

Penetrating a 2.0-million-b/d market and displacing up to 50% of the supply with 1.0 million b/d of new Canadian crude oil would pose a significant challenge. CAPP says it would likely require displacement of regional indigenous sources of production and supply, which have an obvious competitive location advantage over any Canadian-sourced crude supplies.

Two new markets were assessed in CAPP's study: California and the US Gulf Coast. Both provide significant demand opportunities: about 1.5 million and 6.5 million b/d, respectively. In addition to the relative size of the new markets, the primary demand is for medium and heavy crudes.

Today, about two thirds of California refinery feedstock are from either local production or Alaska North Slope (ANS) crude brought in by tankers. Both of these sources are experiencing substantial declines, on average in excess of 4%/year.

California refiners face a growing reliance on foreign crudes. Most of this import growth is in medium sour crude. CAPP's report says over the last 5 years, the dependence on foreign medium crudes (sweet and sour) has more than tripled, rising to almost 325,000 b/d from 100,000 b/d.

An additional market consideration for tanker movements off the West Coast is Southeast Asia. The region represents a large, expanding market that continues to seek new sources of supply to meet a rapid growth in demand.

Market netback comparison

As price takers in the North American market, says CAPP, Canadian producers generally bear the cost of transporting their products to markets. As the distances to these markets increase, the corresponding transportation costs increase. Consequently, the netback producers receive on Canadian crudes is reduced for sales to more distant markets.

The Muse Stancil study analyzed, under several assumptions, refining economics and relevant transportation costs to various markets to assess the valuation associated with introducing new western Canadian crude streams. On an industry basis, there was an advantage that favored building a West Coast pipeline and developing new markets in California vs. the US Gulf Coast.

The Muse Stancil study concluded that the benefits for a western export pipeline arise from an expanded overall market size and reduced Canadian-on-Canadian crude competition for market share in the US Midwest.

The CAPP study notes that if refiners in the US Midcontinent areas expand their capacities to process heavy oil, the incentive to construct a western export pipeline would be reduced relative to a pipeline to the eastern and southern US markets.

New route alternatives

One route option would be construction of a new 400,000 b/d, 1,300-mile pipeline between western Canada and the US Midwest capable of transporting a combination of light and heavy crudes. Once in the Chicago-Wood River region, existing pipelines could be reversed for further access to the US Gulf Coast.

CAPP feels a new pipeline infrastructure to the gulf would provide producers access to multiple new markets, from the US Midwest to the gulf, and in a number of areas in between.

Canadian West Coast-California, Asia

This option builds a new pipeline from western Canada to deliver crude oil to a new deepwater port at either Prince Rupert or Kitimat, BC. The option represents the shortest distance of new construction among the possible pipeline scenarios, at about 690 miles. The project allows access to markets in Washington, California, Asia, and even the US Gulf Coast via the Panama Canal.

The outlook for Alaskan crude production, much of which flows into California, has somewhat stabilized over the last 2 years but long-term forecasts continue to indicate an expected steeper decline beginning as early as 2006. The report says many of the Canadian medium and heavy sour crude grades should be able to compete effectively with the waterborne alternatives currently used by refiners. Consequently, if Canadian crudes can be delivered at a comparable price, California could develop into a sizable market.

Tolls, comparative netbacks

In the evaluation of different pipeline expansions, shipping costs (i.e., tolls) are a key factor in assessing the options, as these costs have a direct impact on producers' netbacks.

The tolls for California and Southeast Asia include tankers and pipeline shipping costs. Waterborne shipping costs can vary significantly and add some uncertainty to the tolls for these routes.

To match the timing associated with production growth, says the report, ideally a new pipeline would start with low usage and build throughput volumes as production increases over time. Unfortunately, pipelines do not operate efficiently with low throughput volumes.

Pipelines require minimum threshold volumes. For large new pipelines, this minimum volume could be up to 200,000 b/d or more depending on the size of the pipeline.

The challenge is for new pipeline capacity to match the growth in supply without creating significant excess in aggregate. Tolling of new capacity also may affect how costs are shared among producers.

Editor's note: The entire CAPP report is available at,

The Canadian Association of Petroleum Producers (CAPP) represents 150 companies that explore for, develop, and produce natural gas, natural gas liquids, crude oil, oil sands, and elemental sulfur throughout Canada.

CAPP member companies produce more than 98% of Canada's natural gas and crude oil. CAPP also has 125 associate members that provide a wide range of support services for the upstream crude oil and natural gas industry.