Oil From the North Country, Part 2 - As More Canadian Crude Flows South, a Push to Expand Pipes

U.S. crude oil imported from Western Canada averaged almost 3.6 MMb/d in the first 10 months of 2020 and accounted for 60% of total imports over the period. That’s some growth! Ten years ago, Canada was sending less than 2 MMb/d south and contributing only 21% of total U.S, import volumes. Alberta oil sands producers are planning for more production and export growth through the 2020s, with most of the incremental volumes bound for Midwest and Gulf Coast refineries and export docks. If that happens — and there’s no certainty it will — more north-to-south pipeline capacity through the U.S. heartland will be needed. Today, we continue our series on the efforts to expand or reverse crude oil pipelines between the U.S./Canada border and the Gulf of Mexico.

Despite Canada’s now firmly entrenched role as the U.S.’s leading supplier of crude oil, it’s been a tough few years for producers up north. In Part 1, we explained that as production in the Alberta oil sands in particular grew quickly over the past decade, the pipelines that transport most of that supply south to U.S. markets filled up. That forced some midstreamers to apportion access to their pipelines, and prompted many producers and shippers to turn to more expensive crude-by-rail as an alternative delivery method. By the fall of 2018, pipeline constraints and increased use of rail crushed prices for Western Canadian Select (WCS) and other regional blends, leading the spread between WCS and WTI prices to balloon to more than US$40/bbl. In January 2019, Alberta’s provincial government implemented a production cap to ease takeaway constraints and shrink the WTI/WCS price spread. The spread did shrink to a more acceptable level and as a result, production curtailments were eased through the remainder of 2019 and into 2020. Just as it seemed that things were returning to normal, COVID-19 arrived, sharply reducing demand for oil and spurring nearly 1 MMb/d in production cuts in Western Canada as a whole — the vast majority of the cuts occurring in Alberta. The only good news was that as production fell, pipeline constraints disappeared and crude-by-rail volumes dropped to their lowest level in years.

More recently, Western Canadian oil production has been rebounding, and oil sands producers are proceeding with plans to expand output over the next few years with a combination of entirely new oil sands projects and “bolt-ons” to existing projects (see yesterday’s blog, Levitating, where we forecast Canadian crude supply growth). To address long-standing pipeline constraints — and to prepare for even higher export volumes — midstreamers have been working to add new takeaway capacity, with varying degrees of success. The Canadian government’s Trans Mountain Corp. is still at least a year and a half away from finishing its Trans Mountain Expansion (TMX; dashed light purple line in Figure 1) from Edmonton to the Vancouver, BC, area, and TC Energy’s much maligned and long-planned Keystone XL (dashed light-green line) may be about to lose its Presidential Permit.