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Canada Oil Faces Fresh Pipeline Shortage

Baystreet - Mon Feb 26, 5:27AM CST
For years, Canadian oil producers have been struggling with insufficient pipeline capacity to take their products to buyers. Anti-pipeline policies have been a big reason for that, along with environmental opposition.

Now, the same government that has been following the above policies is close to completing the biggest pipeline project in years: the Trans Mountain pipeline expansion. But it seems it may be too little, too late for the industry, with warnings already flashing about a coming capacity shortage.

The expanded Trans Mountain will add 590,000 barrels daily to the country's oil pipeline network. That would be 590,000 bpd that could potentially be exported to countries other than the United States, boosting Canadian oil prices that have been depressed for years because of that pipeline shortage that has limited producers' market to their southern neighbor.

Producers are already ramping up production in anticipation of the additional offtake capacity. Reuters reported last year that 2024 and 2025 could see a production increase of 375,000 bpd from the oil sands alone. That would be an 8% increase from the 2022 total number, which was 4.86 million barrels daily.

Those were analyst estimates at a time when the completion of the Trans Mountain expansion was not certain. With a project that has been delayed repeatedly, with snags at every steps, it is easy to see where that lack of certainty came from. Now, the expansion is in its final stage, close to completion, with just 2% left to build. Perhaps it is finally safe to say that the new Trans Mountain pipeline will enter operation, and soon.

The problem that analysts see now is that with production already on a growth trajectory, it will only provide producers with offtake capacity relief for a very short while—a couple of years or so.

Reuters, for instance, cited BMP analyst Ben Pham as saying that the completed Trans Mountain pipeline would increase Canada's total pipeline capacity to 5.2 million barrels daily. Production is already at around 5 million bpd, so this leaves a margin of 220,000 bpd, according to Pham, as spare capacity.

Yet it will quickly evaporate because production growth will continue, says RBN Energy analyst Martin King. Instead of four or five years of capacity comfort, as originally expected, the Trans Mountain expansion may only provide relief for about a couple of years.

"Originally it was thought TMX would give us a four- or five-year window," the analyst said recently, as quoted by Reuters. "It now looks like that window of spare capacity might actually be a lot smaller."

It would be small indeed if production growth continues to be strong, as recently suggested by a senior Enbridge executive, who said he expected the industry could boost output by half a million barrels daily this year.
The problem with a pipeline shortage is that Canadian producers suffering from a chronic discount on their oil because of the existing shortage and market limitations will continue to endure the discounts.

Initially, enthusiasm around the Trans Mountain expansion drove projections of higher prices and slimmer discounts to WTI, but now reality is setting in, and analysts are changing the tune, warning that the slim discount may not last for long.

There is, however, the international market factor. Even if the new and improved Trans Mountain fills up in no time, there will be a bigger pool of potential buyers with heavy crude in great demand worldwide due to relatively limited supply. This could take care of that discount to WTI, which in the past two years has hovered around $18-19 per barrel, at least for a while.

Canadian oil production could hit 5.3 million barrels daily this year, according to a projection by S&P Global Commodity Insight from last October. This would be a record high and an excess on the country's pipeline network. On the flip side, it could be a short-lived record because it appears to be driven, according to S&P Global, by efficiency gains rather than investment in new production.

"This could be the last really large hurrah before we see a material slowdown in Western Canada supply growth," Kevin Birn, S&P Global chief analyst for Canadian oil markets, said in October, as quoted by CBC. "We do see this plateauing effect really beginning around 2025 and 2026."

If production does plateau, then the pipeline capacity shortage will take care of itself. But if the above projection does not materialize, then Canadian oil producers will have to boost oil train use again to supply their U.S. clients.

The Trans Mountain pipeline is scheduled to begin operation in the second quarter of the year. Oil production in Alberta is already rising, hitting record highs in November and December at over 4.2 million bpd, Bloomberg reported this week. The records prompted a surge in oil train loadings and a rationing of capacity on Enbridge's Mainline pipeline system.

If those analysts are right, this won't be the last time pipeline space needs to be rationed and oil trains deployed on a greater scale. If they're right, the Trans Mountain expansion will only provide temporary relief for drillers and oil sands miners.

By Irina Slav for Oilprice.com

Provided Content: Content provided by Baystreet. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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