Canada: ‘Too much crude, too few pipelines’

Pipeline congestion caused by approval delays and aggravated by a November leak in the Keystone system has cost oil producers in western Canada as much as $17/bbl (Can.), say economists at Scotiabank.

Pipeline congestion caused by approval delays and aggravated by a November leak in the Keystone system has cost oil producers in western Canada as much as $17/bbl (Can.), say economists at Scotiabank.

“Canada’s oil patch once again finds itself with too much crude and too few pipelines, depressing the value of Canadian crude relative to US and global benchmarks,” write Jean-Francois Perrault, senior vice-president and chief economist, and Rory Johnston, commodity economist, in a research note.

At current levels, the abnormal transport discount costs Canadian producers $15.6 billion/year, they say.

An expected increase in rail transportation, which has been slow to materialize, would lower forgone revenue only to $10.8 billion.

“Pipeline-approval delays have imposed clear, demonstrable, and substantial economic costs on the Canadian economy,” Perrault and Johnston write.

Pipelines delayed

Political opposition has delayed the Keystone XL expansion of the Keystone system, expansion of the Trans Mountain system, and reconstruction of Line 3 (OGJ Online, Jan. 31, 2018). Two other projects, Northern Gateway and Energy East, have been canceled.

The Scotiabank economists expect the crude-price discount in western Canada to remain well above normal until Line 3 enters service in second-half 2019. But they say completion of either the Trans Mountain expansion or Keystone XL will be needed to return price differentials “to a state reflective of adequate take-away capacity.”

During November 2015-November 2017, when take-away capacity was sufficient, the price difference between Western Canadian Select (WCS) crude at Hardisty, Alta., and West Texas Intermediate (WTI) crude at Cushing, Okla., averaged $13/bbl.

Of that, the economists estimate $8/bbl reflected quality differences and $5/bbl differences in transportation costs, although other variables influence those values.

With oil production growing in western Canada and little progress in pipeline construction, Scotiabank last year warned that the WCS-WTI differential would rise to $18/bbl this year from $12/bbl in 2017.

Keystone leak

But the discount spiked after a Nov. 16, 2017, leak of about 5,000 bbl in the Keystone pipeline, which suspended operations for 12 days and now flows at 20% reduced capacity.

The WCS discount peaked at $30/bbl after the disruption and has mostly stayed above $25/bbl.

Perrault and Johnston point out that oil not moved by pipeline must be either stored or transported by rail, which can cost $20/bbl or more for shipment to the US Gulf Coast, compared with $10/12/bbl for pipeline transport.

Although rail transport of oil has risen recently, railroad companies hurt by the crude-price slump of 2014 have been reluctant to recommit to oil service. They’re asking producers to commit to multiyear take-or-pay contracts.

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