Never Say Goodbye, Part 3 - Will Rebounding Canadian Crude Production Fill Up Pipelines?

Western Canadian producers have been deeply impacted by lower crude oil prices and the demand-destroying effects of COVID-19. This past spring, oil production in the vast region dropped by an estimated 940 Mb/d, or as much as 20% from the record highs earlier this year. Taking that much production offline helped in at least one sense: it eased long-standing constraints on takeaway pipelines like Enbridge’s Canadian Mainline, TC Energy’s Keystone Pipeline, and the government of Canada’s Trans Mountain Pipeline. Production has been rebounding this summer, however, and there are indications that pipeline constraints may be returning and apportionment of uncommitted space on some pipes may again become a persistent issue. Today, we continue a review of production and takeaway capacity in Alberta and its provincial neighbors with a look at apportionment trends on the biggest pipelines.

As we explained in Part 1 of this series, oil producers in Western Canada responded to sharply lower oil prices and lower demand by reducing production by 940 Mb/d between February and the peak of the cutbacks in May. Three-quarters of the cuts occurred in Alberta’s oil sands in response to single-digit pricing for the heavy oil price benchmark of Western Canadian Select (WCS) during April. However, WCS prices recovered steadily through May and June, and have since been holding steady between $30/bbl and $35/bbl (all in U.S. dollars). As a result, production has begun to recover: we estimate that about half of the 940 Mb/d supply reduction had been restarted by early July, and there are indications that production has continued to rise as the summer wears on.

Those supply gains may end up being held back for a period of time this month, however, due to an outage on a key pipeline that ships diluent from Edmonton to the Fort McMurray oil sands region. A line break occurred on August 29 to Inter Pipeline Ltd.’s (IPL) Polaris Pipeline (see He Ain’t Heavy, He’s My Diluent for details on Polaris). As of September 4, IPL indicated that it had restored partial service to the western portion of Polaris (the eastern portion was not affected by the outage), but the outage still appeared to be hampering bitumen production from Imperial Oil’s Kearl mining site, whose capacity is 220 Mb/d. Imperial stated that it had fully shut down Kearl on September 2 due to lack of diluent supply, and a full restart of the mine was dependent on the timing of Polaris’s full return to service, which had yet to be determined. Events such as the Polaris outage could be another factor that further delays a complete refill of Canada’s major oil export pipelines until later this year, depending on the length of the outage.