Livin' on a Prayer - How Alberta's Oil Production Cap Became Redundant in Crazy Times

Western Canada’s relentless, decade-long increase in crude oil production began maxing out its export pipeline capacity in the past few years. With more supply than could be carried by pipelines, exporting crude by rail tank car became the next best alternative, leading to record amounts of rail-based exports earlier this year. However, this year’s wild swings in oil prices and COVID-led demand destruction resulted in drastic production cutbacks that freed up space on pipelines and put the kibosh on more expensive crude-by-rail, at least temporarily. Things are shifting again, though. With oil production recovering somewhat in the past couple of months and excess pipeline capacity dwindling, are we headed for a resurgence in the use of rail to export Canadian crude? Today, we conclude a series on Western Canada crude production and takeaway options with an analysis of what’s ahead for crude-by-rail.

In May of this year, Western Canada’s oil production shut-ins due to weak demand and poor pricing were estimated to have peaked near 1 MMb/d, resulting in a 20% drop from the near-record production levels reached only a few months earlier. The magnitude of the production fall in such a short period of time caused a significant drop in the utilization of pipelines that transport crude oil from Alberta to other parts of Canada and the U.S. All of a sudden, pipelines that had been heavily rationing their capacity over the past couple of years to accommodate steadily rising production suddenly had ample spare capacity. With those supplies now on the road to recovery, pipelines have begun to fill some of that extra space and are moving toward rationing capacity once again. Today, we continue our review of Western Canadian production and takeaway capacity with a look at how this spring’s production cuts affected the region’s biggest pipelines.

The oil price meltdown earlier this year and demand destruction wrought by COVID-19 forced Canadian crude oil producers to throttle back output. At the height of the cutbacks in May, almost 1 MMb/d of oil supply had been curtailed due to uneconomic prices and/or lack of downstream demand. With oil prices and demand having staged a partial recovery in the past few months, production is rising off the lows and producers are talking about even higher supplies in the months ahead, with the prospect of returning to pre-pandemic levels. Today, we begin a short series that reviews the recent production pullback and discusses how producers are positioning themselves for a resurgence of their oil supplies.