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 saga of the crude oil pipelines that transport Canada’s production to market has had many twists and turns. With increasing supplies the past few years outstripping available pipeline capacity, a number of large capacity expansions have been proposed, but they have been frequently stymied by regulatory and legal roadblocks on both sides of the U.S./Canada border. We have blogged many times about these pipelines’ trials and tribulations, most recently in The Shape I’m In, How Long and Canadian Pipedream. Some progress is being made in adding new pipeline capacity, but only in small fits and starts, and it remains well below the levels needed to move all oil supplies to market by pipe.
The end result of this has been too many barrels competing for too little pipeline capacity. Winners and losers in this competition are determined in a process known as apportionment. Under apportionment, a shipper’s monthly nominated supplies for a given pipeline are reduced by the pipeline operator so that it can accommodate all shippers’ requests. (See Maybe It’s Time for a more detailed explanation of apportionment.) Apportionment had become such a standard part of the Canadian oil pipeline landscape in the past few years that it no longer generated surprise when shippers were having their nominated volumes reduced by 50% or more in some months.
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