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The Shape I'm In - Rising Canadian Production, Takeaway Constraints and WCS Price Discounts, Part 4

With Western Canadian crude oil production rising, available pipeline takeaway capacity shrinking and crude-by-rail volumes rebounding, midstream companies are ramping up their efforts to get long-planned pipeline projects built. But that’s no easy task. Virtually every plan to add new takeaway capacity out of Alberta — Canada’s #1 energy-producing province — continues to face regulatory hurdles, and it remains to be seen which of the pipeline projects will be completed, and when. We can’t just throw up our hands, though, and say, “Who knows?” With pipeline constraints out of Western Canada worsening by the month and having profound negative effects on the price of Western Canadian Select (WCS), there’s real value in reviewing in some detail what these pipeline projects are up against. Today, we discuss what’s being planned on the takeaway front and where these projects stand.

This is the fourth episode of our Canadian crude blog series. In Part 1, we set the stage with a look at the recent collapse in the price of WCS versus West Texas Intermediate (WTI) and the 12-day shutdown of the Keystone Pipeline in November 2017. These events highlighted the facts that Alberta production in particular is rising, pipeline takeaway capacity out of the province has not kept pace, and pipes are running so full that some owners have been forced to apportion access to them. We noted that while WCS had been selling at a steady $10/bbl discount to WTI earlier in 2017, the pricing differential collapsed later in the year to as much as $25/bbl. While the leak and subsequent shutdown of the Keystone Pipeline in November was the spark that ignited the most recent decline in WCS prices, the fundamentals behind the widening gap between WCS and WTI prices were already in place.

In Part 2, we examined the historical and projected growing volume of crude oil produced in the Western Canadian Sedimentary Basin (WCSB). In that supply assessment, we noted that crude oil volumes in the region had grown from around 2.5 MMb/d in 2010 to roughly 4.0 MMb/d in 2014. Although the crash in WCS crude oil prices in 2014 slowed the pace of investment in new oil sands projects, production volumes in Western Canada are still projected to reach 5.0 MMb/d by 2025, raising the questions of where all this crude will go and how will it get there?

Part 3 discussed current local demand for crude oil in the WCSB and the existing crude oil pipelines out of the region. In sum, when we factored in the nameplate capacity and the historical utilization factor for each of the seven refineries there, local refinery demand totaled slightly above 550 Mb/d through 2017, and will grow to 600 Mb/d when the 50-Mb/d first phase of North West Redwater Partnership’s (NWRP) new Sturgeon Bitumen Refinery northeast of Edmonton, AB, becomes fully operational this year. As for takeaway pipelines, their capacity totals about 3.5 MMb/d, including about 2.8 MMb/d on the all-important Enbridge Mainline System, which consists of six pipelines (Lines 1, 2, 3, 4, 65 and 67) that run from Alberta or Manitoba to Minnesota or Wisconsin. Other key pipes include TransCanada’s Keystone, Enbridge’s Express Pipeline System, and Kinder Morgan’s Trans Mountain.

Today, we turn our attention to proposed crude oil pipelines and planned pipeline expansions to help address Western Canada’s need for additional takeaway capacity as production in the oil sands and other areas continues to rise.

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