Pipeline pinch adds to oilsands woes
Producers face higher costs by looking to rail
• Call it the pipeline pinch, or maybe the Keystone quagmire.
While plans by Canadian companies f rom Suncor Energy to Canadian Natural Resources to boost oil output are racing to fruition, the construction of three pipelines needed to move that product to market, including the infamous Keystone XL, is lagging years behind.
The end result: Producers have little choice but to move those extra barrels by train, with costs two to three times higher than pipeline shipping. It’s an unwelcome added expense after oil plunged about 20 per cent from this year’s peak. Futures prices have settled in below $ 45 a barrel, after many predicted it would rise to $60.
“We’re not going to see significant new pipeline capacity until late 2019 or 2020,” said Nick Schultz, vice president for pipelines and regulatory matters at the Canadian Association of Petroleum Producers. In the meantime, the extra expense for shipping “impacts royalties and other things that impact the public.”
During the Obama administration, oilsands producers feared a future when they would have to rely heavily on costly railway shipments if he didn’t approve Keystone XL. That may start this year.
Pipelines in Western Canada, which holds the world’s third-largest oil reserves, can carry about 3.3 million barrels of crude a day, according to CAPP. Meanwhile, the area is expected to produce 3.92 million barrels a day this year and 4.2 million next year as a number of large oilsands projects come online.
The looming bottleneck adds a new urgency to the industry’s calls for more capacity and may lend credence to its argument that the lack of lines hurts the economy.
Oil producers have long lamented the dearth of pipelines carrying their supplies to the east and west coasts, saying the situation leaves them able to export only to the U. S. and forces them to accept whatever price American refiners will pay. Environmentalists have opposed new or expanded pipelines, arguing that burning the crude locked up in the oil sands would contribute to catastrophic global warming.
The industry saw glimmers of hope last year, when regulators approved expansions of Kinder Morgan Inc.’s Trans Mountain pipeline linking the oil sands with export facilities in B.C. as well as Enbridge Inc.’s Line 3 running from Hardisty, Alta., to the U. S. border in Manitoba. The pipeline situation got another boost when President Donald Trump approved TransCanada Corp.’s Keystone XL, which spans from the oil sands to the U. S. Gulf Coast. Kinder Morgan this month entered into credit agreements totalling $5.5 billion to help fund the development of Trans Mountain.
Yet, Keystone still needs to win approvals from regulators in Nebraska, and the Line 3 project has faced delays that pushed its in-service date back to 2019. The fate of Trans Mountain also has been called into question after the uncertain election result in B.C. last month.
Meanwhile, there are a handful of massive new oil projects that will start production this year and next. Suncor’s Fort Hills oilsands project is expected to begin production in the fourth quarter and ramp up to about 90 per cent of its capacity of 194,000 barrels a day within 12 months. Canadian Natural plans to complete another phase of expansion at its Horizon mine this year that will add 80,000 barrels a day.
While Suncor has pipeline space reserved for output from Fort Hills, the company believes market access is important to oil producers and the economy, said Sneh Seetal, a spokeswoman. Canadian Natural isn’t concerned with transportation of Horizon’s production because the operation produces light oil, which has fewer shipping constraints, said spokes- woman Julie Woo.
The Hebron project off the coast of Newfoundland and Labrador also is expected to come online this year. Operated by Exxon Mobil Corp. with investments by Chevron Corp., Suncor, Statoil ASA and Nalcor Energy Corp., Hebron is expected to have crude oil production capacity of 150,000 barrels a day at its peak.
All that extra Canadian crude promises to be a boon for railroad companies who were stung by declines in that business when crude prices crashed in 2014. In fact, some already are seeing a pickup in their oil business. Canadian Pacific Railway Ltd. CEO Keith Creel said last month that the company had moved 17,000 carloads of oil so far this year, nearly meeting its forecast for 20,000 carloads for all of 2017.
Canadian National Railway Co. foresees a twoyear window of opportunity before Trans Mountain starts up and crude- by- rail shipments are affected, Chief Commercial Officer JeanJacques Ruest told an investor presentation June 14.
If crude- by- rail demand “comes in, you want to ride it very hard, and if at some point the opportunity disappears, then you ride something else,” Ruest said.
Crude and condensate accounted for about $370 million of revenue at Canadian National Railway last year. That’s less than half the $750 million that the company generated from the same line of business in 2014. The company’s overall revenue was $12 billion last year.