By John Mayes and John Auers
The Academy Award nominated song, “Blame Canada,” a classic (and infamous) South Park satirization of scapegoating came to mind when we heard about the leak and subsequent shutdown of TransCanada’s Keystone pipeline recently. After the leak was discovered in Hutchinson County, South Dakota, on April 2, TransCanada activated its emergency response procedures and immediately shut down the 570 MBPD pipeline, a key cog in the infrastructure delivering crude from Western Canada to refineries in the U.S. While the associated spill was very limited (estimated at 400 barrels of crude oil), and no significant impact to the environment is expected, just the mere fact that an incident occurred has provided fresh ammunition to the anti-pipeline and anti-oil crowd.
TransCanada is famous, of course, for its long-standing efforts to construct the thus far ill-fated Keystone XL pipeline. XL was to run from Hardisty, Alberta, to Cushing, Oklahoma, but its construction permit was denied last year by President Obama. This denial came after many years of delay and significant and very vocal opposition from environmentalists and assorted industry opponents. Other pipelines proposed to transport growing volume of crude from Western Canada to refining markets have also been delayed due to similar opposition. Whether the refrain is “Blame Canada” or “Blame Oil Companies” the potential results could be the same – Western Canadian production is stymied as outlets to markets are blocked.
In today’s blog, we take a look at crude oil takeaway capacity out of Canada and the potential impacts of further incidents. What would be the impact on the U.S.? What would be the impact on Canada? Oil spills often get dramatic coverage in the mainstream press because of the larger issues of increased use of pipelines (i.e., Keystone XL) and rising Canadian oil sands output (greenhouse gas effects). Currently, there is sufficient pipeline capacity to transport rising Canadian production out of the area to refining centers (when all existing pipelines are operational). If environmental concerns impede future infrastructure development, however, when will this capacity be fully exhausted and future Canadian production growth jeopardized?
“With all their hockey hubbabaloo”
There are five pipeline systems which transport crude oil (bitumen based or conventional) out of Western Canada. These pipelines have a combined capacity of nearly four million BPD and serve a variety of markets in North America. The Enbridge system (nearly 2.7 million BPD) is by far the largest and most flexible. With access to most PADD II refineries, the system also links to Cushing which allows deliveries to numerous Gulf Coast refineries. With the startup of Line 9 in the second half of 2015, oil from Western Canada can now flow eastward to Montreal.
The TransCanada Keystone pipeline (with the aforementioned oil spill) has a capacity of 590 MBPD and flows directly to Cushing with an extension to Port Arthur, Texas. PADD IV is supplied by the Spectra Express and the Plains Rangeland lines, while the Kinder Morgan TransMountain pipeline flows westward to Vancouver and then to Anacortes, Washington.
“Times have changed”
In addition to pipeline shipments, an increasing volume of rail movements are also being utilized. In 2014, approximately 185 MBPD of crude from Western Canada was transported by rail. This volume increased to around 200 MBPD in 2015, but future gains are clouded by the crude price decline which has compressed differentials and made rail economics more challenging.
“We must blame them and cause a fuss, before someone thinks of blaming us”
Complicating the Canadian takeaway calculation is that substantial volumes of Bakken crude are also shipped on the same pipeline systems and reduce the capacities available for Canadian shipments. The magnitude of Bakken shipments varies depending on crude-pricing differentials. When substantial volumes of Bakken are being railed to PADD I, pipeline shipments to PADD II and PADD III refineries can be as low as 250 MBPD. When Bakken rail movements to PADD I are reduced (as is currently the case), Bakken movements on pipelines can be as high as 500 MBPD.
“It seems that everything’s gone wrong since Canada came along”
The last variable in calculating the Western Canadian infrastructure balance is future Canadian crude production growth. Even with growth being slowed by the current low oil price environment, we believe Western Canadian oil supply (which includes diluents) will rise from 4.0 million BPD in 2015 to 4.5 million BPD in 2020 and nearly 4.8 million BPD in 2025. After adjusting for local Alberta refining demand, this production growth forecast indicates that additional pipeline capacity will not be required until 2018 to 2022, depending on the volume of Bakken which is shipped by pipelines.
While the 2018 date may seem too imminent, it can easily be deferred by increased utilization of the already available rail facilities in Canada or the construction of additional capacity. The Canadian Association of Petroleum Producers (CAPP) has estimated that rail shipments could rise to between 500 MBPD and 600 MBPD by 2018 if no additional pipeline capacity is added. This would push the requirement for a new crude exit pipeline well into the next decade, even with higher Bakken pipeline movements.
”Should we blame the government?”
Numerous pipeline projects have been proposed which could alleviate potential supply bottlenecks for many years to come. Unfortunately, the development of most of these has become bogged down in permitting fights by local groups in regions which must be traversed. The major exception to this is the restoration of the Enbridge Line 3. Portions of this line (the cross-border pieces in particular) were utilized in the Alberta Clipper expansion. Enbridge is proposing to replace the entire line from Hardisty to Superior, Wisconsin, which would increase the system capacity by 370 MBPD.
The remaining projects, while much larger, are significantly more problematic. Multiple environmental and regional forces have announced opposition to each of the other four projects, while other groups lobby for a cap in bitumen production to slow the growth of greenhouse gases. Approval for any is far from certain, and with a leak like this, the opposition is sure to say “I told you so!” The infamous DeSmogBlog wasted no time in latching on, fanning conspiracy of a cover up (FAA airspace restrictions and lack of pictures) and the multiple different spill volumes that were reported. The additional “experts” quoted in the article help to boost the actual risks of problems in the public’s eyes, without acknowledging any of the many benefits the pipeline brings.
“Blame Canada, Blame Canada”
The recent oil spill by the Keystone pipeline can teach us many lessons. First, even relatively new pipelines can and will have leaks. TransCanada was very vigilant, however, emergency procedures worked as planned, and the volume of the spill was very minimal. Secondly, even when the spills are very small, the pipeline is likely to be shut down. Depending on the size of the line, this could temporarily reduce the Alberta exit capacity by several hundred thousand barrels per day. Even though the duration of the downtime may be short, the resulting price spikes could be dramatic. This is particularly true during periods when the pre-existing exit capacity is relatively small. Currently, there appears to be a capacity cushion in the 300 MBPD to 600 MBPD range. As this decreases in the future, however, the pricing effects of even short pipeline shutdowns could become significant.
Turner Mason & Company analyzes the impacts of changes in crude pipelines and transportation logistics on crude markets and prices. We recently released our Crude and Refined Products Outlook which looks closely at the midstream sector. In The Outlook, we take a look at crude pipeline projects as well as other midstream trends. We take that analysis and overlay that with our crude production forecasts, evaluating the impact that potential over or underbuild scenarios may have on crude supply and production. For more information on this or our other publications, or if we can provide any other specific consulting services for you, please feel free to contact us.