Oil sands producers could feel squeeze as pipeline capacity tightens
http://business.financialpost.com/2012/11/28/oil-sands-producers-could-feel-squeeze-as-pipeline-capacity-dwindles/
Claudia Cattaneo | Nov 28, 2012
Plans are under way to build oil pipelines south, west and east, but even if they are successful they’re not going to alleviate today’s problem: Many of Canada’s oil pipelines are full and it’s only a matter of time before they choke off oil growth.
Already, analysts are warning the next steps will be production shut-ins and the rationalization of oil sands projects so only the less expensive go ahead.
Coping strategies are expected to come into focus as producers announce their investment plans for 2013 over the next few days and weeks, starting with Canadian Oil Sands Ltd. on Thursday.
Pipeline capacity has been getting tighter because of surging production from Alberta’s oil sands and from tight oil fields across North America.
Space will be substantially smaller than demand in December, when Enbridge Inc. will “apportion” space on a number of its key pipelines – Line 5, Line 14, Line 6B, Line 6A/62, Line 4/67, Line 4. Kinder Morgan Inc. is apportioning space so that only 30% of producers’ hoped-for volume gets into its regularly oversubscribed TransMountain pipeline in December.
“It’s no secret that there is pressure on the system and that we are full,” said Graham White, spokesman for Enbridge.
The apportionment is significant and will mean discounts on Canadian oils could get worse into January and “potentially force some producers to shut in production,” Peters & Co., the Calgary energy investment bank, said in a report.
CIBC World Markets analysts expect discounts between Canadian oils and West Texas Intermediate (WTI) to persist throughout next year.
“This differential has been volatile in 2012, but we believe it will be an even bigger issue in 2013. Why? Because there are only two pipelines that connect from the North of PADD 2 [in the U.S. Midwest] to Cushing (Keystone and Spearhead) and both are full. Unfortunately, this will be the case until Flanagan South comes on in mid-2014 and the full Keystone XL build in 2015 (hopefully!),” they said in another report.
Canadian heavy crude sold at a discount of more than US$30 a barrel under the U.S. benchmark, WTI, this month compared with around US$15 only a month earlier.
Producers have been pushing more and more of their oil onto rail cars, but that’s expensive and seen as a temporary backup plan. It has also been insufficient to remove bottlenecks and now rail cars are running out.
The discounts are biting into the returns of producers who don’t have refineries and into government revenue.
In a mid-year fiscal update Wednesday, Alberta said its resource revenue was $1.4-billion lower than expected and put much of the blame on the differentials.
“The biggest factor affecting our resource revenue right now is the lack of market access for our oil,” Finance Minister Doug Horner said in a statement.
“We have one customer and one means to ship our product to them. On the other hand, our customer has many different suppliers to choose from. This is not a good situation to be in and it’s costing us dearly. The differential is about $29 a barrel right now — multiply that by two-and-a-half million barrels a day and the result is a tremendous impact to Alberta’s finances.”
Saskatchewan is also being affected. In its fiscal update Tuesday, the province said its expected surplus would be significantly smaller — $12.4-million, down from $95-million — because of lower oil and potash revenue.
With so much value going out the door, and pipeline expansion plans so uncertain, an obvious option is to reduce growth.
CIBC analyst Andrew Potter suggests Canadian Natural Resources Ltd. may take a pause before starting its Horizon oil sands project expansion, and Suncor Energy Inc. may push back by a year its plans for the Fort Hills mine and defer indefinitely its Voyageur upgrader and Joselyn mine projects so that investors view them as cancelled.
But other projects that have been under development for years, such as Imperial Oil Ltd.’s Kearl oil sands mine that is on the verge of producing its first oil, can’t be switched off.
The natural gas side of the business shows stopping growth is not easy. Prices have been uneconomic for years, drilling is down, and yet production keeps increasing.