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The Shape I'm In - Rising Canadian Production, Takeaway Constraints and WCS Price Discounts, Part 5

Three major crude oil pipeline projects now under development would add nearly 1.8 MMb/d of much-needed takeaway capacity out of the Western Canadian Sedimentary Basin (WCSB), a region hit hard by pipeline constraints and widening price differentials. But each of the three projects — Kinder Morgan’s Trans Mountain Expansion (TMX), Enbridge’s Line 3 Replacement Project and TransCanada’s Keystone XL — continues to face regulatory challenges and it remains unclear how many of the projects will advance to construction and how soon the first of them might come online. It’s also possible that one or more may go the way of Northern Gateway and Energy East, two major pipeline projects that went belly-up after years of planning. Today, we continue our blog series on Western Canadian crude oil with a look at Keystone XL and its prospects.

This series provides a soup-to-nuts review, considering WCSB production volumes (historical and projected), in-region refineries, pipeline and crude-by-rail takeaway capacity, and the effect that all of these factors have on prices. This is the fifth episode. In Part 1, we looked at the recent collapse in the price of Western Canadian Select (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 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 it will 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 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.

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