Pipeline projects to move Canadian crude near tipping point

Houston — The North American energy sector is nearing a tipping point that will soon decide whether to build a series of oft-delayed and heatedly debated pipelines designed to move more Canadian crudel to the US Gulf Coast or Canadian port hubs.

Multibillion-dollar projects including TC Energy's infamous Keystone XL pipeline, Enbridge's Line 3 replacement project and the Trans Mountain pipeline expansion to the Vancouver area have been in the works for years, and 2020 could finally determine their fates if the remaining regulatory and legal hurdles are resolved. If not, some may slowly die on the vine now that pipeline projects have become the epicenter of the anti-fossil fuel movement that's merged the efforts of environmentalists and indigenous peoples.

In the meantime, companies are doing what they can to increase their capacities on existing Canadian pipeline systems while also shipping more crude by rail, even amid a recent rash of derailments and rail blockade protests. Other US pipeline projects moving forward are intended to help ship additional Canadian crude to the USGC through a more piecemeal, connect-the-dots approach. All of these efforts are essentially workarounds while the largest projects remain pending.

"We could soon start seeing a bevy of construction. But the question marks are still around the big guys," said Matt Murphy, an energy analyst with Tudor, Pickering, Holt & Co. in Calgary.

And, yet, the US is importing more Canadian crude oil than ever even as overall US crude imports shrink to their lowest volumes in almost two decades. There's still a strong desire for additional pipelines to carry heavier Canadian crudes, especially to USGC refiners thirsty for those grades as imports dwindle from Venezuela, Mexico and much of the Middle East.

Already, new pipeline capacity projects are being completed to add more volumes by using drag-reducing agents to improve crude flows without requiring heavy construction. The lower-cost chemical process triggers steadier flows in the pipelines - and less turbulent motion - to move incremental barrels.

"The pipeline optimizations are starting to show up," Murphy said. "And rail exports aren't slowing down materially despite the blockades."

All of the pending projects would add more than 2 million b/d of pipeline capacity from Alberta, according to Tudor Pickering, helping to alleviate the burden on rail shipments and more meandering pipeline routes. The Canadian Association of Petroleum Producers projects that oil sands output will rise by nearly 1.3 million b/d by 2035.

However, as oil prices collapse worldwide amid a new Saudi-Russia pricing war and coronavirus market fears, some pipeline decisions could be impacted or at least delayed in the coming weeks and months.

Sweat the small stuff

The biggest Canadian pipeline system into the US, Enbridge's Mainline pipeline network, in December added about 100,000 b/d through drag-reducing optimization efforts. Another 50,000 b/d in additional capacity are slated to slowly come online throughout 2020. The Mainline system has the capacity to move up to 2.85 million b/d.

Enbridge's Express Line and TC Energy's existing Keystone Pipeline system also are undergoing optimization for an extra 50,000 b/d each.

Similarly, Plains All American Pipeline plans to add at least 70,000 b/d on its system that moves crude on multiple pipelines from Alberta to the Cushing, Oklahoma storage and pricing hub. Plains would tack on capacity to its Rangeland and Western Corridor pipelines that combine to stretch to Wyoming. And its Saddlehorn pipeline would get an extra 100,000 b/d from the Rockies to Cushing. Those projects won't all be completed until mid-2021.

Plains' Diamond pipeline extension and Capline pipeline reversal, which are scheduled to be finished by early 2022, would provide additional links to the Louisiana Gulf Coast.

Phillips 66 is working with multiple partners, including Plains, to build the brand-new Red Oak and Liberty pipelines to ship oil, including Canadian grades, from Montana, Wyoming and Colorado to Cushing and the Texas Gulf Coast near both Houston and Corpus Christi. Those two projects should come online next year.

As of the end of 2019, the percentage of US oil imports from Canadian crude had risen to 60%, up from less than 25% a decade ago. In December, the US imported 6.83 million b/d of crude, including a record-high 4.13 million b/d from Canada. About 350,000 b/d of those volumes came from rail - the second-highest month on record, according to the Canada Energy Regulator.

S&P Global Platts had assessed Western Canadian Select oil midway through last week at a $14.30/b discount to the West Texas Intermediate benchmark. The grade has strengthened about $8.40/b so far this year, a move sources have attributed to strong global demand for heavy crudes, higher crude-by-rail exports and increased flows on existing pipelines.

WCS traded much weaker in 2018, before Alberta's government implemented a production cap after the grade hit a record-low discount $51.50/b in October 2018 because of a lack of transportation infrastructure.

The pipeline tariff from Hardisty to USGC is between $8/b to $12/b, with traders often saying there needs to be a $10/b spread between Hardisty, Alberta and the USGC to be economical. Likewise, it costs about $12/b to ship crude from Hardisty to the USGC on a committed rail contract.

Fights for the big guys

As for the largest projects, many energy analysts see the Line 3 project and Trans Mountain as more likely to proceed - despite numerous delays - while the Keystone XL project may only seem feasible if the pipeline-friendly Trump administration remains in office after 2020. The Trans Mountain project is only slowly progressing because the Canadian government bought it from Houston-based Kinder Morgan, which had threatened to walk away.

Ethan Bellamy, an energy analyst with Robert W. Baird & Co., is less bullish. These projects are more about shipping oil out than fulfilling demand, he said. While the USGC refiners want more Canadian crude, the volumes aren't absolutely essential.

"These projects are all supply push, not demand driven," Bellamy said. "The market does not need more Canadian oil, but producers need to get it to market."

And the environmental movements that pushed the Obama administration to reject Keystone XL, and that hampered Energy Transfer's Dakota Access Pipeline amid a heavy slate of protests in 2016 and 2017, haven't gone away. If anything the climate change fight has intensified, he said. Yet, the Dakota Access Pipeline is slated to see its capacity nearly doubled in about a year through the construction of a series of new pumping stations, and without requiring new piping.

"If anything, the DAPL protests galvanized the confluence of climate and indigenous activists," Bellamy said. "If KXL moves forward, as it appears to be doing, I fear it will be an ugly, bloody affair that will test the rule of law."

Those environmental and political obstacles are part of the reasons why, in February, Vancouver-based Teck Resources dropped plans for an expensive project to further develop Canada's oil sands.

The next big Canadian pipeline project into the US likely is Enbridge's Line 3 project, which was completed in December on the Canadian side, but some regulatory steps remain in Minnesota. The pipeline was originally supposed to be finished last year but is now looking at late 2021 at the earliest.

Enbridge CEO Al Monaco said that about one-third of the heavy crude processed by USGC refiners comes from Canada, but that those volumes should rise to at least 50% as imports fall from Venezuela and Mexico.

And TC Energy isn't giving up on Keystone XL either. In February, the project got approval from the US Bureau of Land Management to build on federal lands. However, some litigation remains pending in Montana and final approval is still required from the US Army Corps of Engineers. In the meantime, TC Energy is searching for a joint venture partner to share in the risks and costs for a project that is likely three years away from being online - if ever.

Demand is not the problem, insisted CEO Russ Girling during TC Energy's last earnings call.

"If we had any more capacity on the Keystone system, we'd be able to sell it multiple times over, under 20-year terms," Girling said. "Existing capacity is becoming a rare commodity. And people want to sign up and secure it for the long term."