(Canadian) Pipedream - Is Western Canada Suddenly Headed for a Crude Pipeline Overbuild?

For most of the past three years, Western Canadian producers have had to deal with crude oil pipeline constraints — takeaway-capacity shortfalls serious enough to spur huge price discounts for the region’s benchmark Western Canadian Select (WCS) that are sufficient to support the higher cost of crude-by-rail alternatives. But things are changing, and fast. WCS prices are at or near historic lows — low enough to convince a number of producers to rein in their capital spending and production. Crude-by-rail use is down, and there’s even space available on the usually maxed-out Enbridge Mainline system, the region’s primary pipeline egress. And wouldn’t you know it, just as production is slipping and constraints are easing, real progress is being made on three big pipeline projects that had long been in limbo: the Line 3 Expansion, the Trans Mountain Expansion (TMX) and Keystone XL. Today, we provide an update on Western Canadian crude takeaway capacity and examine whether the region may — irony of ironies — end up with too much.

There’s never a dull moment in Western Canada’s hydrocarbon market. Since the earliest days of the RBN blogosphere, there’s been plenty to write about: new oil sands projects, rising bitumen production, the need for diluent, not enough pipeline capacity, steep price discounts for WCS, new rail-loading terminals — wildfires, even. Producers in the Canadian West have been through a lot, but they are now facing some of their toughest times ever. As we said a few days ago in Rock Bottom, while producers in the Permian and other shale plays in the U.S. have been hit by sub-$30 and even sub-$25/bbl prices for West Texas Intermediate (WTI), producers in Western Canada have seen prices for WCS fall to less than $10 and even $5/bbl. In response, a number of oil sands producers have decided in recent days to reduce their planned 2020 capital spending and trim their production; some said they’ll also scale back or even scrap their crude-by-rail programs due to the higher cost of transporting heated bitumen and “railbit” (bitumen plus diluent) by rail. Also, we understand that there’s been a decline in light-oil production in the region, again in response to super-low prices.

Now, with Western Canadian production flat or even slipping, Alberta and its provincial neighbors for the first time in a long time have enough pipeline capacity in place to accommodate the vast majority of their takeaway needs. As it turns out, this supply-takeaway balance — and the likelihood of stable output for the foreseeable future — comes as the three big pipeline projects that producers in the region have been waiting for are finally moving forward. Next, we’ll review each of the projects and update their status; after that, we’ll take a look ahead to the possibility that within two or three years, Western Canada may have more takeaway capacity than it knows what to do with.

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