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Dearth of Pipeline Capacity Plagues Canadian Oil Producers

The shortage of pipelines and rail transportations has disrupted the production schedule of the companies in Western Canada. The companies had to slow down their activity levels due to difficulty in crude transportation.

Oil sands companies such as Cenovus Energy Inc. CVE, Suncor Energy Inc. SU and Canadian Natural Resources Ltd. CNQ witnessed a decline in share prices after Cenovus Energy announced a cut in its production at Christina Lake and Foster Creek complexes. Cenovus Energy and Suncor Energy hold a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Per Cenovus Energy, Christina Lake and Foster Creek complexes have been operating at reduced levels since February 2018.  

Factors Causing Transportation Issues

The new supply, which has arrived in the market from the start up of new oil sands, is facing transportation issues as Keystone pipeline lowered shipments in November 2017, thanks to a spill. This has pushed the heavy Canadian crude prices to trade close to the largest discount to U.S. benchmark oil futures in more than four years. Other existing pipelines are fully committed, while exporters shipping crude using rail have faced hindrances amid excess grain that is to be transported.

The heavy discount between Canadian crude prices and futures has forced the oil sands players to shut their plants this month for maintenance. For instance, Canadian Natural Resources’ Peace River oil sands site is currently under maintenance. Moreover, it has also reduced its pace of the ramp up and completion of some wells.

Per industry researcher Genscape Inc., Western Canadian crude production was more than the pipeline capacity to transfer it to markets by 87,000 barrels per day (bpd) in December 2017. This is expected to grow to 338,000 bpd by the end of 2018.

How are Companies Coping?

Cenovus Energy has maintained its full-year oil sands production within the earlier projection of 364,000-382,000 bpd. But the company anticipates first-quarter output in the range of 350,000-360,000 bpd.

The companies are trying to reduce the impact of pipeline and rail constraints by scheduling the maintenance accordingly. They are also in talks with rail providers to work out the issue of lack of locomotive hauling capacity disturbing its Bruderheim crude-by-rail facility near Edmonton.

Toward the end of the year, more volumes are expected to move by rail. Rail companies are eager to help but they need to work out the availability of power and the locomotives needed for this purpose. This will give the much-needed relief as about 900,000 bpd can be exported by rail.

New Pipelines Facing Legal Issues

Enbridge Inc.’s ENB Line 3 replacement spanning across Hardisty, Alberta and Superior, Wisconsin, is expected to provide Canadian takeaway capacity over the next few years. However, the project is still awaiting approval from Minnesota. When operational, the pipeline will augment takeaway capacity by 125,000 bpd.

Kinder Morgan Inc.’s KMI Trans Mountain pipeline has also been facing considerable objection and even TransCanada Corp.’s TRP Alberta-to-Nebraska Keystone XL pipeline. The International Energy Agency (IEA) anticipates the pipelines not to be ready prior to 2021.

Oil Production in Canada

Canada is the fourth-largest producer and third-largest exporter of oil, globally. About 97% of Canada’s proven oil reserves are located in the oil sands and 99% of the total extracts are exported to the United States.

Canada is expected to continue pumping out more oil from the oil sands over the next few years. However, constraints like pipeline approvals and ambiguity over the provision of more export capacity is discouraging the next wave of development. These obstacles are part of a wider capacity crisis developing in North America.

Regardless of the lack of pipelines, Canada is likely to be among the countries with highest oil output over the next few years. The country’s overall production will reach 5.6 million bpd by 2023, versus 4.8 million bpd this year.

Bottom Line

The call of the moment is to expedite the process of approving the pipelines under scanner. If this does not happen or the process is delayed, the increased supply coming out of oil sands in the coming years will face shortages in midstream capacity. Also, the Canadian heavy oil benchmark — Western Canada Select — will trade at high discount.

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