The recent failure of TransCanada’s Keystone pipeline on November 16, 2017, and its impact on pipeline export capacity is the major reason Canadian oil producers are facing export constraints.
Export challenges when capacity is offline while integrity issues are dealt with have impacted diluted bitumen pricing. As crude supply backs-up in Alberta, the expected and natural discount of Western Canada’s heavy oil is increasing.
Despite some articles in the media that claim it is a lack of new pipelines that is “costing” Canada, the real reason for the pressure on pricing is that pipeline operators cannot keep the pipelines they have safe.
Until Keystone spilled 5,000 barrels of Alberta crude into a field in South Dakota, there was sufficient pipeline export capacity to deliver Western Canadian crude to market. Operator filings required by National Energy Board regulations prove this to be the case.
While Keystone was shut for almost two weeks last November, approximately 6 million barrels of predominantly diluted bitumen failed to make its way to market. When Keystone re-opened, it was under pressure restrictions taking about 120,000 barrels of capacity offline—indefinitely. The US regulator has determined that Keystone’s problem links back to its construction in 2008 and may be present in other segments of the system.
The last time pipeline safety problems restricted capacity for Western Canadian exports in a major way was in July 2010. Enbridge’s Line 6B erupted and spilled 20,000 barrels into the environment near Marshall, Michigan. Much of the diluted bitumen made its way into the Kalamazoo River.
In March 2013 a group of shippers on Enbrdige's Mainline system explained under oath to the US Federal Energy Regulatory Commission how the Kalamazoo spill continued to compromise capacity. Shippers documented how apportionment constraints on Mainline (called Lakehead in the US) were due to the shut down of Line 6B following the rupture at Marshall, Michigan. They confirmed that apportionment continued because pressure restrictions were imposed once the pipeline was restarted.
With capacity compromised because of Line 6B’s shutdown, and resulting pressure restrictions when the pipeline reopened, pricing of Alberta’s heavy oil came under pressure shortly after Line 6B’s failure. Discounts remained abnormally wide until mid-2014 when the line was completely replaced with a wider pipe. This returned not only the original capacity into service, but an additional 200,000 barrels a day.
From mid-2014 until late 2017, the price differential for Canadian diluted bitumen remained well within its expected range for quality and transportation cost considerations.
Keystone’s failure has changed all that.
Both the Line 6B and Keystone ruptures--and their negative impact on crude export volumes and prices--make a strong business case for oil producers to ensure pipeline operators learn how make the diluted bitumen pipelines they have are safe before any new pipeline projects move forward.