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One Is the Loneliest Customer - Disappointed by Keystone XL Setback, Canadians Look to Asia

It’s been a tough few years for Canadian oil producers. As they ramped up production in the oil sands, Canadian E&Ps faced pipeline takeaway constraints that drove down the price of Western Canadian Select versus Gulf Coast crudes. The Keystone XL pipeline would have largely solved things, but when that project was killed by Canada’s U.S. friends and neighbors, oil sands producers had to settle for a series of smaller, more incremental projects that provided only a partial fix. The devastating Alberta fires of May 2016 reduced production and pretty much eliminated constraints for much of this year. But volumes have recovered, and if oil sands production is to continue growing, more pipelines and new customers will be needed. Today we consider Canada’s long-running effort to ensure there’s enough capacity to move its crude to market, two major projects that just won the backing of the Canadian government, and what may be next.

The “serenity prayer” —a good one to know, in these uncertain times—goes like this, “God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.” As we’ll get to, Canadians appear to be taking these words to heart when it comes to the development of pipeline takeaway capacity.

First, let’s briefly review the recent history (2009-16) of oil sands and other Canadian production growth and the concurrent efforts to develop sufficient pipeline takeaway capacity to move their mix of conventional heavy crude, diluted bitumen (or “dilbit,” a mixture of bitumen and a diluent such as condensate, natural gasoline or other light hydrocarbon liquid—see Heat It for more on dilbit), and other crudes and crude blends to Midwest and Gulf Coast refineries and other customers. (One of the better-known dilbits is Western Canadian Select, or WCS, which is a combination of 20 heavy conventional oil streams, bitumen from the oil sands, upgraded bitumen—also known as light synthetic oil, or SCO—and condensate, a superlight crude added to meet pipeline viscosity requirements.)  The U.S. is pretty much Canada’s only oil customer, by the way. According to Canada’s National Energy Board (NEB), of the 2.86 MMb/d of Canadian crude exported in the second quarter of 2016 (the most recent number available), only 12 Mb/d (less than 0.5%) went to countries other than the U.S.

Canadian production rose steadily from 2009 through 2015—from 2.7 MMb/d to 3.9 MMb/d, or about 200 Mb/d per year, on average (see Figure 1), mostly due to increased production in Alberta’s oil sands.

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