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We're Here for a Good Time - Will Enbridge's Line 3 Replacement Narrow the WCS/WTI Spread?

Crude oil production in Western Canada has been rising steadily for most of the past decade. Unfortunately, the same cannot be said for its oil pipeline export capacity to the U.S., which has generally failed to keep pace with the increases in production. Dogged by regulatory, legal, and environmental roadblocks, permitting and constructing additional pipeline takeaway capacity has been a slow and complicated affair, although progress continues to be made. The most recent tranche arrived last month with the start-up of Enbridge’s Line 3 Replacement pipeline, which provides an incremental 370 Mb/d of export capacity and should help to shrink the massive price discounts that have often plagued Western Canadian producers in recent years. In today’s RBN blog, we discuss the long-delayed project and how its operation is likely to affect Western Canada’s crude oil market, now and in the future.

In recent years, Western Canada had been chronically short of sufficient oil pipeline capacity to its primary export market: the U.S. At times, the huge mismatch between production and takeaway capacity resulted in enormous price discounts for its flagship Western Canada Select (WCS) heavy-oil blend relative to West Texas Intermediate (WTI) at Cushing — a spread that ballooned to more than $40/bbl in October 2018 and spurred a major rebound in crude-by-rail, a more expensive transport alternative.

That painful episode led the provincial government of Alberta, home to the large majority of Western Canada’s heavy oil and oil sands production, to impose a month-to-month curtailment of crude oil production beginning in 2019 to bring production more into line with available pipeline export capacity. The result was a dramatic reduction in the big price discount for WCS, but clearly a better solution had to be found — one that did not involve complicated monthly adjustments to oil production by producers and curtailment limits by the Alberta government. Although changes in the marketplace and massive production cuts in 2020 led to the eventual phase-out of the curtailments by the end of 2020, the best fix would be to expand pipeline capacity to the U.S. to accommodate current oil production and support some degree of future production growth.

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