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In May of this year, Western Canada’s oil production shut-ins due to weak demand and poor pricing were estimated to have peaked near 1 MMb/d, resulting in a 20% drop from the near-record production levels reached only a few months earlier. The magnitude of the production fall in such a short period of time caused a significant drop in the utilization of pipelines that transport crude oil from Alberta to other parts of Canada and the U.S. All of a sudden, pipelines that had been heavily rationing their capacity over the past couple of years to accommodate steadily rising production suddenly had ample spare capacity. With those supplies now on the road to recovery, pipelines have begun to fill some of that extra space and are moving toward rationing capacity once again. Today, we continue our review of Western Canadian production and takeaway capacity with a look at how this spring’s production cuts affected the region’s biggest pipelines. The saga of the crude oil pipelines that transport Canada’s production to market has had many twists and turns. With increasing supplies the past few years outstripping available pipeline capacity, a number of large capacity expansions have been proposed, but they have been frequently stymied by regulatory and legal roadblocks on both sides of the U.S./Canada border. We have blogged many times about these pipelines’ trials and tribulations, most recently in The Shape I’m In, How Long and Canadian Pipedream. Some progress is being made in adding new pipeline capacity, but only in small fits and starts, and it remains well below the levels needed to move all oil supplies to market by pipe.  The end result of this has been too many barrels competing for too little pipeline capacity. Winners and losers in this competition are determined in a process known as apportionment. Under apportionment, a shipper’s monthly nominated supplies for a given pipeline are reduced by the pipeline operator so that it can accommodate all shippers’ requests. (See Maybe It’s Time for a more detailed explanation of apportionment.) Apportionment had become such a standard part of the Canadian oil pipeline landscape in the past few years that it no longer generated surprise when shippers were having their nominated volumes reduced by 50% or more in some months. As a result of the oil price volatility and oil demand destruction wrought by COVID-19 earlier this year, the apportionment issue has now been turned on its head. As we explained in Part 1 of this series, Western Canada’s oil producers responded to the painful oil market changes by reducing production by 940 Mb/d between February and the peak of the cutbacks in May. About 75% of the cuts occurred in Alberta’s oil sands in response to single-digit pricing for the heavy oil price benchmark of Western Canadian Select (WCS) during April. However, WCS prices recovered steadily through May and June, and have since been holding steady between $30/bbl and $35/bbl (all in U.S. dollars). As a result, production has begun to recover, with our estimate that about half of the 940 Mb/d supply reduction has been restarted heading into July. As you might imagine, a nearly 1-MMb/d supply reduction over three months followed by a ~470-Mb/d rebound over a few weeks caused some of the most extreme swings in shipping volumes ever seen for Western Canada’s crude oil pipelines. We can more closely track these extremes by considering the publicly available flow data for Canada’s three biggest oil pipes: Enbridge’s Canadian Mainline (yellow line in Figure 1), TC Energy’s Keystone Pipeline (green line), and the Government of Canada-owned Trans Mountain Pipeline (purple line). All three of these originate in Alberta, with the 2.9-MMb/d Mainline running east to the U.S. Midwest and into southern Ontario and southern Quebec. The 590-Mb/d Keystone Pipeline flows oil east initially and then south to Cushing, OK, where it connects to TC Energy’s Marketlink Pipeline to the Gulf Coast; there’s also a Keystone spur line from Steele City, NE, to Patoka, IL. Trans Mountain, with a capacity of 300 Mb/d, runs west from Edmonton, AB, to a refinery in southern British Columbia and then to the Westridge export dock in Burnaby, BC, or — via a small spur line — to Anacortes, WA. There also are a number of smaller-capacity oil export pipelines for which we do not have publicly available monthly flow data. These would include the Enbridge-owned Express Pipeline (blue line), which runs from the Alberta/Montana border to Casper, WY, and the Milk River and Rangeland pipelines (orange line and pink line, respectively) owned by Plains Midstream Canada, which also start in southern Alberta, but ship crude to receipt points near Laurel and Billings, MT. Figure 1. Primary Crude Pipelines Out of Alberta. Source: RBN As for the three biggies that we’ll be focusing on today — the Canadian Mainline, Keystone, and Trans Mountain — they have a combined export capacity of nearly 3.9 MMb/d, which accounts for about 90% of all the available oil pipeline capacity leaving Alberta. All three of these pipelines saw noticeable drops, with cumulative flows falling by 523 Mb/d from February to May. This is considerably less than the total supply drop of 940 Mb/d mentioned earlier; the 400-Mb/d-plus remainder of the supply drop was absorbed primarily by lower oil exports by rail (a topic we’ll discuss in an upcoming episode of this blog series).  The biggest of these three pipelines, the Canadian Mainline (chart to left in Figure 2), witnessed a decline of 465 Mb/d to 2,455 Mb/d in the February-to-May time span (blue bars, left axis), or about 16% compared to the pre-downturn flows in February. Based on data from the Canada Energy Regulator (CER), this was the lowest volume seen for the Mainline since October 2017. Mainline volumes in June, the last month available, show a further decline — albeit a small one — to 2,436 Mb/d. The Mainline’s capacity utilization fell from 100% (at 2.91 MMb/d) in February to 82.4% in June (red diamonds, right axis). Although July data is not yet available for the Mainline, Enbridge indicated in its latest investor presentation that July flows on the U.S. portion of the Mainline (known as the Lakehead system) had risen to 98% of the pre-downturn levels, and flows on the Canadian portion into Ontario were at 86% of the pre-downturn levels. We estimate this to result in overall July flows of about 2,770 Mb/d, a gain of 337 Mb/d versus June and in the ballpark of the amount of recent production restarts that we estimated in Part 1. Figure 2. Crude Oil Flows on the Canadian Mainline, Keystone, and Trans Mountain Pipelines. Source: CER The next-largest of the three pipelines, TC Energy’s Keystone (center bar chart), saw a smaller relative drop of 46 Mb/d to 538 Mb/d from February to May (gray bars), or around 8%, while June volumes rebounded slightly, by 5 Mb/d to 543 Mb/d. That left Keystone’s utilization at just north of 95% (green diamonds). The sharp drop in Keystone volumes last fall was due to an October 2019 line break; repairs were completed in late November. Finally, the Canadian government’s Trans Mountain Pipeline (right bar chart), saw volumes dip a modest 13 Mb/d for the same three months to 270 Mb/d (orange bars), or about 5%; volumes did fall further into June by another 13 Mb/d to 258 Mb/d. That left Trans Mountain’s utilization at 95%. So, it was the Canadian Mainline that was hit hardest in terms of the volume and utilization reductions compared to Keystone and Trans Mountain. We believe that this is a function of not only the relative size of the Mainline compared to the other two pipes, but also that the Mainline operates (currently) under a common-carrier model in which the pipeline’s capacity is allocated to shippers on a month-to-month basis without any long-term commitment and no financial penalty for a shipper not shipping crude in a given month. Enbridge is in the process of transitioning the Mainline to long-term contracts, but has yet to finalize this process with its shippers and the CER (see Push Comes to Shove for more detail). In contrast, both the Keystone and Trans Mountain pipelines operate with most of their respective capacity locked in under long-term contracts, meaning shippers pay for the use of the pipe’s capacity whether they move oil or not. As such, the incentive for shippers and producers would have been to first cut their oil flows as much as possible to the Mainline, before reducing flows to Keystone or Trans Mountain. That’s how this spring’s production reductions in Western Canada affected the major takeaway pipelines there. But with supplies starting to recover, what’s ahead for pipeline utilization going forward, and how long might it be until the pipes are full again? We’ll discuss that in Part 3.  "Never Say Goodbye" was written by Jon Bon Jovi and Richie Sambora and appears as the ninth song on Bon Jovi’s third studio album, Slippery When Wet. Released as a single outside the U.S. in June 1987, the song still went to #11 on the Billboard Rock Tracks chart and #28 on the Hot 100 Airplay Survey. Personnel on the record were: Jon Bon Jovi (lead vocals, rhythm guitar), Richie Sambora (lead guitar, backing vocals), Alec John Such (bass, backing vocals), Tico Torres (drums, percussion), and David Bryan (keyboards, backing vocals). Slippery When Wet was recorded at Little Mountain Sound Studios in Vancouver, BC, with Bruce Fairbairn producing. The album was released in August 1986 and went to #1 on the Billboard Top 200 Albums chart. It has been certified 12x Platinum by the Recording Industry Association of America. Four singles were released from the album. Bon Jovi is an American rock band formed in Sayreville, NJ, in 1983 by Jon Bon Jovi, Richie Sambora, David Bryan, Tico Torres, and Alec John Such. Such was replaced by Hugh McDonald in 1994 and Sambora by Phil X in 2013. Bon Jovi has released 15 studio albums, three live albums, five compilation albums, five EPs, and 66 singles. The band has sold over 130 million records worldwide, and has won two American Music Awards, one Billboard Music Award, one Brit Award, one Grammy Award, two MTV Video Music Awards, and two World Music Awards. Bon Jovi was inducted into the Rock and Roll Hall of Fame in 2018. The band has completed a new album, but the release date and touring plans are on hold due to COVID. |
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