It seems that, once again, Canada is struggling to build crude oil pipeline export capacity fast enough to keep pace with production growth. The latest setback came with the announcement that completion of the Canadian government-owned Trans Mountain Expansion (TMX) will be delayed until the third quarter of 2023 and that the 590-Mb/d project will cost almost twice as much as previously estimated. The latest six-to-nine-month delay appears to set the Canadian oil industry on a path to exhausting its spare export capacity by later this year. And that’s not good news for producers. In today’s RBN blog, we consider this latest TMX announcement and what it might mean for pipeline constraints and heavy oil price differentials.
Canadian midstream companies have been fighting a seemingly endless battle to expand its oil pipeline export capacity at a rate that stays ahead of Canada’s rising crude production. The benefits from having sufficient pipeline capacity are clear. When there are little or no pipeline constraints, the price discounts for Western Canadian Select (WCS), the region’s benchmark heavy crude oil, stay close to the cost of transporting that crude via pipelines. And that helps to maximize economic returns to producers and to Canada. When there is insufficient capacity, the story is quite different: steeper price discounts and the loss of economic value for exported barrels.
It was just this past October that Canada was finally back in the position of having a modest amount of excess pipeline export capacity when the start-up of the Enbridge Line 3 Replacement (L3R) project created an additional 370 Mb/d of incremental capacity from Alberta to the U.S. Midwest. Indeed, after some short-term market fluctuations in October and November (dashed red oval in Figure 1), the price of WCS vs. WTI promptly narrowed back to the $12-$14/bbl range (dashed green oval) — the approximate pipeline transportation costs to the Midwest/Gulf Coast — with all current indications that at least a modest surplus of export pipeline capacity from Alberta to the U.S. remains.
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