Analysis: Trans Mountain expansion may not give long-term price relief to Canada's booming oil output

Canada Energy Partners

21/02/2024 11:00

By Nia Williams
       Feb 21 (Reuters) - Canadian oil producers expect the
discount on their crude to shrink significantly when the Trans
Mountain pipeline expansion (TMX) starts this year, but the
relief may be short-lived as surging supply looks set to exceed
the country's pipeline capacity in just a few years.
    TMX will ship an extra 590,000 barrels per day (bpd) of
crude, trebling existing capacity to Canada's Pacific Coast once
the C$30.9 billion ($22.8 billion) expansion is finally
complete. The Canadian government-owned project has hit
technical issues on its final leg of construction, but is still
targeting a second quarter in-service date.
    For much of the last decade, oil companies in the world's
No. 4 producing country have been forced to sell their barrels
at a deep discount to global prices due to lack of pipeline
capacity to export crude.
        Once TMX is operating, Canadian heavy crude
differentials should narrow to around $10-$12 a barrel under
U.S. benchmark crude from more than $19 a barrel currently, BMO
analyst Ben Pham said in a note to clients last week.
    He estimated the expansion would lift Canada's total
takeaway capacity to 5.2 million bpd, leaving 220,000 bpd of
unused space on pipelines.
    Still, oil sands production is rising so rapidly that some
market players think Canada could again run out of pipeline
space in less than two years, said RBN Energy analyst Martin
King.
        "Originally it was thought TMX would give us a four- or
five-year window," King said. "It now looks like that window of
spare capacity might actually be a lot smaller."
    Canadian producers could add up to 500,000 bpd of supply
this year and next year alone, Colin Gruending, executive vice
president of liquids pipelines at midstream firm Enbridge Inc
 ENB.TO , estimated on an earnings call this month.
    The prospect for more bottlenecks would likely widen the
discount again, and could deter companies from longer-term
investments in growing Canada's production.
    For existing pipeline operators, the rising production and
strong demand for capacity is good news. Enbridge said it may
continue rationing space on its 3.1 million bpd Mainline
pipeline system even once TMX starts operating, allaying
concerns among some analysts the company could see a drop in
volumes and revenues.
    
    MORE OPTIONS
    Most of the new capacity on TMX will be for heavy crude
barrels, meaning light and synthetic crude oil is most likely to
face rationing on the Mainline and any resulting price
discounts, said RBN's King.
    The new capacity on TMX will give heavy crude producers a
choice of sending barrels to the U.S. west coast and Asia, or to
the U.S. Midwest and Gulf Coast on existing pipelines.
    On a recent earnings call, Imperial Oil  IMO.TO  CEO Brad
Corson said having spare pipeline capacity would lift the value
of heavy crude for the entire Canadian oil industry.
    Imperial will continue to move most of its barrels to the
Midwest and Gulf Coast, while keeping a look out for the
highest-value markets, he added.
    Ryan Bushell, president of Newhaven Asset Management, which
holds shares in pipeline companies including Enbridge, said TMX
would likely run at less than full capacity if strong pricing on
the Gulf Coast, the world's largest heavy crude refining centre,
drew barrels onto pipelines heading south.
    "It all depends on where the best pricing is, for the first
time in a long time producers will have optionality," Bushell
said.
    No matter how fast TMX fills up, it is likely to be Canada's
last major export pipeline ever built, due to regulatory
hurdles, environmental opposition and uncertainty about future
oil demand.
    "The potential for brand new pipelines getting built is
pretty close to zero," RBN's King said.
    
($1 = 1.3542 Canadian dollars)

 (Reporting by Nia Williams
Editing by Denny Thomas and David Gregorio)
 ((nia.williams@thomsonreuters.com; +1 403 531 1624; Reuters
Messaging: nia.williams.thomsonreuters.com@reuters.net))