Pipeline Congestion

RBN estimates that midstream companies have built out about 950 Mb/d of crude-by-rail (CBR) loading terminal capacity in Western Canada. Data from the Energy Information Administration (EIA) shows actual CBR shipments from Canada to the U.S. topped out at 195 Mb/d in January 2015 and have fallen by 40% since then. Hard-pressed Canadian producers have been squeezed by lower prices and high transport costs with only limited relief as new pipelines came online. Today we review the fate of Canadian CBR transport capacity.

If you think that yesterday’s 13 year-low CME/NYMEX crude settlement price ($26.21/Bbl – February 11, 2016) is bad news for struggling U.S. producers then try putting yourself in Canadian producer’s shoes! The headwinds facing Western Canada’s heavy oil sands these days would try the patience of a saint. Prices for benchmark Western Canadian Select (WCS) blend in Alberta traded as low as $12.50/Bbl in January 2016 – clawing back to $14.06/Bbl on February 10, 2016. But by the time gathering, transport and diluent purchase costs are subtracted, the netback (market price less transport cost) at the lease is negative for many producers – especially when shipping by rail.  To be clear, that’s below zero at the wellhead!  Yet there are few signs that production is falling off – at least in the short term. Today we lament the ongoing plight of Canadian producers.

Delays to the Enbridge Sandpiper project bringing greater volumes of Bakken crude onto the Enbridge Mainline system at Superior, WS threaten to limit the supply of crude to feed refineries in Quebec when Enbridge’s Line 9B reversal project comes online in November 2015. The market impact could push crude prices higher in North Dakota. Today we discuss the crude supply picture and possible impact when Line 9B opens up.

Pipelines delivering crude to Houston from the South Texas Eagle Ford are estimated to be half empty. Yet over 200Mb/d of crude is shipped from that basin to refineries in Houston and further east along the Gulf Coast by barge. One of the key reasons appears to be that local traffic congestion and a lack of adequate throughway pipeline capacity past Houston pushes barrels not needed locally onto the water to reach refineries in Louisiana. Today we explain the Houston crude traffic problem.

Bakken crude-by-rail (CBR) volumes are down this year and pipeline shipments are increasing as production levels off in the wake of last year’s price crash. The trend is encouraged by lower price differentials between domestic and international crude as well as new pipelines coming online. Since 2012 a combination of rail and pipeline has given Bakken producers ample crude takeaway capacity but pipelines alone have not had sufficient capacity on their own. However, with production slowing down, pipeline capacity is catching up and by 2017 there should be enough pipelines to carry all North Dakota’s crude to market. Today we start a two part series asking whether pipelines can replace CBR from North Dakota.

The price discount for Canadian heavy crude benchmark Western Canadian Select (WCS) sold in Hardisty, Alberta versus Gulf Coast equivalent heavy grade Maya has narrowed from $35/Bbl last November to less than $12/Bbl today. The discounts to Maya this year have been less than the cost of rail transportation between Western Canada and the Gulf Coast – reflecting improving crude takeaway capacity. Next month the 600 Mb/d Flanagan South pipeline from Chicago to Cushing and the 450 Mb/d Seaway Twin from Cushing to Houston will open more new capacity for Canadian crude to compete against Maya at the Gulf Coast. The result is likely to be even lower differentials. Today we discuss the likely impact.