Companies putting crude into storage

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He said he believed Enbridge’s Line 3 replacement project would be the first of three proposed oil pipeline projects (the other two being TransCanada’s Keystone XL and Kinder Morgan Canada’s Trans Mountain expansion) to be in service.

Line 3 would restore 375,000 bpd of pipeline capacity between Alberta and Superior, Wisc. The project is still awaiting regulatory approvals in Minnesota but Jarvis said work is nearly complete in Wisconsin and Canada.

Even in a scenario where two competing oil pipelines are built, Jarvis said Enbridge does not expect volumes on its network to be “materially affected” because there is so much additional oil production forecast in the coming years.

Western Canadian oil production hit 4.16 million barrels per day by November, compared to 4.05 million bpd at the start of the year, according to the National Energy Board, forcing pipeline operators like Enbridge to apportion barrels on their systems. In response, many oil companies have moved a large amount of crude into storage tanks in Edmonton and Hardisty, Alta. and are also utilizing rail cars to export their barrels.

These developments have led to a doubling of the discount Canadian producers must accept for their barrels, as they miss out on the oil price rally. WTI prices have risen steadily over the last six months and the benchmark traded at US$57.16 per barrel Tuesday, while Brent crude prices also briefly surged to US$65 on fears of a pipeline disruption in the North Sea.

The discount between the two North American benchmark prices would remain wide over the next several years and average between US$13 and US$18 per barrel, after the discount was smaller at US$11 to US$12 per barrel earlier this year, according to Fitch Ratings.

The credit rating agency said in a note Tuesday that the wider discount was a result of “the current lack of pipeline capacity out of Canada in the face of growing oilsands production and, after 2020, the phase out of high-sulphur fuel oil as a marine fuel, which is also expected to weigh on the WCS discount.”

The lack of available pipeline capacity came into sharp focus last month, when TransCanada Corp. shut down its Keystone pipeline system between Alberta and the U.S. Gulf Coast after a leak in South Dakota. The line is shipping oil again, but at reduced volumes.

“What that did is accelerate an issue that was going to happen in 2018,” Genscape crude oil analyst Mike Walls said, adding the widening in differentials between WCS and WTI had been forecast but the Keystone issue has moved the timing forward.

“These are the widest differentials we’ve seen in three years,” he said.

Walls said oil producers reacted by moving barrels into storage tanks in Alberta, leading to “larger than normal builds in Western Canada.”

Oil companies also scrambled to find oil-by-rail cars to move their barrels to the U.S.