IHS Markit provides western Canadian pipeline outlook

The ‘Entitled Pipelines, Prices and Promises: The Story of Western Canadian Market Access, the Canadian Oils Sands Dialogue’ report from IHS Markit examines the relationship between pipelines and prices, the implication of delay in new pipeline capacity that has occurred in western Canada and the current outlook for the industry.

Absent new pipeline takeaway capacity, Canadian crudes will face limitations from the existing pipeline infrastructure as western Canadian volumes continue to build, the report says.

“The need for new pipelines departing western Canada has not diminished with lower oil prices, quite the opposite,” said Kevin Birn, Energy Director for IHS Markit, who leads the Oil Sands Dialogue. “Canada remains a growth story with production volumes increasing since the oil price collapse. And, with continued growth, it appears inevitable that volumes will overtake an already-constrained system and create a resurgence of crude-by-rail.”

The report notes that transportation costs are a key reason why oil prices differ between regions. While quality differences entail price differences between different types of crude oil, transportation costs contribute to the price differences between crude of the same quality across regions.

In the past, capacity constraints have contributed to price volatility, a rise of crude-by-rail shipments and a loss of economic value for western Canadian producers, according to the report. During one such period of constraint (a five month period from November 2012 to March 2013) western Canadian Select crude realised approximately CAN$30/bbl less than Mexican Maya, a crude of similar quality. The difference in price equated to approximately CAN$6 billion in lost revenue over the period.

A survey of recent major pipeline proposals conducted for the report found that the length of the pipeline review process (from first application through the end of 2016) has averaged more than five years per project, creating uncertainty for project proponents and western Canadian producers alike.

Although the recent approvals of the Keystone XL pipeline by the Trump administration and Trans Mountain expansion by the Government of Canada have returned a level of optimism for pipeline projects, potential for additional delays exists, according to the report.

If four major pipeline projects (the Alberta Clipper expansion, the Energy East pipeline, the Keystone XL pipeline and the Trans Mountain expansion) advance as currently proposed, they could add approximately 2.9 million bpd of new capacity between 2019 and 2022, enough to move western Canadian pipeline takeaway capacity from shortage to surplus.

The report notes that, although the US (particularly the Gulf Coast) remains the most likely market for growing Canadian heavy production due to the regions pre-existing refinery capacity capable of processing heavier crudes, lessons from the timing of the Keystone XL project and concerns over a possible resurgence of US protectionism have highlighted the importance of market diversification.

Since none of the currently proposed pipeline would come online prior to 2019, a resurgence of crude-by-rail shipments out of western Canada is likely to occur through the end of the decade, the report concludes.