Maybe It's Time - A New Tolling Framework for Enbridge's Mainline Crude System?

The recently mandated reduction in Alberta crude oil production has helped to ease takeaway constraints out of Western Canada, but only temporarily. Worse yet, it’s unclear how long it will take to add new takeaway capacity from challenged projects like the Trans Mountain Expansion Project or Keystone XL. In the midst of all this trouble and uncertainty, Enbridge is pursuing a potentially controversial plan to revamp how it allocates space — and charges for service — on its 2.8-MMb/d Mainline system, the primary conduit for heavy and light crudes from Western Canada to U.S. crude hubs and refineries. Today, we begin a series on the company’s push to shift to a system that would allocate most of the space on its multi-pipe Mainline system to shippers that sign long-term contracts.

It’s been an interesting few years for the Western Canadian crude oil market. Since 2010, Western Canadian Sedimentary Basin (WCSB) production has increased from ~3 MMb/d to ~5 MMb/d, with virtually all of the incremental output available for export. Pipeline capacity from the WCSB to the U.S. has been rising too — from ~2.7 MMb/d nine years ago to ~4 MMb/d now — but not quickly enough to keep up with production gains. In 2018, with export volumes meeting and even exceeding available pipeline takeaway, there was a resurgence in crude-by-rail (CBR) volumes and a widening in the WCS-WTI spread. As we said a couple of months ago in Money Changes Everything, that price differential grew to nearly $40/bbl in November (2018), prompting the provincial government of Alberta — the center of WCSB production, including the oil sands — to institute a mandatory production cut (starting in January 2019) in an effort to bring Alberta output more in line with available takeaway capacity. The governmental intervention, while criticized for being just that, seemed to do the trick; the price of WCS shot up, the WCS-WTI spread narrowed dramatically, and by late January, the province had eased planned production curtailments for February and March.

That’s not to say that the troubles facing Western Canadian producers are over — far from it. Figure 1 shows that the volume of WCSB crude available for export (black line) has been bouncing up against — and sometimes even exceeding — the available pipeline-export capacity provided by the six major pipelines out of Western Canada, including the Enbridge Mainline (light gray layer), TransCanada’s Keystone (medium blue layer), and the Canadian government’s Trans Mountain Pipeline (purchased from Kinder Morgan last year; dark blue layer). This very high utilization of export pipelines suggests that super-wide WCS-WTI spreads could return at any time, particularly when province-imposed production caps are lifted and new oil-sands projects, such as Canadian Natural Resources’ 40-Mb/d Kirby North project, start coming online later this year and in 2020.

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