Oil From the North Country - The Push to Expand Canada-to-Gulf-Coast Crude Oil Pipeline Capacity

The province of Alberta has lifted its cap on crude oil production, oil-sands producers are implementing plans to increase their output through the 2020s, and new pipeline capacity from Western Canada into the central U.S. is being added on the all-important Enbridge Mainline system. With those stars aligning, the next big push by midstream companies will be expanding their ability to move Canadian barrels south to the Cushing hub in Oklahoma, the Patoka hub in Illinois, and refineries and export docks along the Gulf Coast. As a group, these new and expanded lines — plus a major pipe reversal — will represent one of the biggest midstream build-outs in the U.S. of this coming decade. Today, we begin a blog series about these projects and what’s driving their development.

It’s been a difficult few years for producers of conventional oil and bitumen in Western Canada. As production in the Alberta oil sands in particular grew quickly through the 2010s, 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. The pipeline constraints and increased use of rail crushed prices for Western Canadian Select (WCS) and other regional blends — by the fall of 2018, the spread between WCS and WTI prices had ballooned 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 it did production curtailments were eased through the remainder of 2019 and into 2020. Just as it seemed that things were returning to normal, COVID-19 reared its ugly head, 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 evaporated and crude-by-rail volumes dropped to their lowest level in years.

More recently, Western Canadian oil production has been rebounding, albeit hesitantly, and oil-sands producers are proceeding with plans to gradually expand production over the next few years with a combination of entirely new oil sands projects and “bolt-ons” to existing projects. Producers and shippers also are anticipating — maybe even praying a little — that sufficient incremental pipeline capacity out of the region will be developed in time to handle the increasing production. Three main efforts have been under way to add out-of-Alberta takeaway capacity, one to the Vancouver, BC, area and two to — and into — the central U.S.:

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