Western Canadian crude-by-rail volumes should increase in Q4 2017, marking the opening of a three-year window in which the stopgap transport method becomes a vital shipping option for growing oil sands production.
By Q2 2018, Genscape expects Western Canadian Heavy oil production to exceed 2.6 million (mn) barrels per day (bpd), while heavy oil takeaway (including local refining and pipeline capacity) remains at 2.52mn bpd, with continued growth in heavy oil/bitumen production well into the 2020’s.
If oil sands crude output increases at those expected rates, some shippers will steadily move barrels on trains until the startup of TransCanada’s 830,000 bpd Keystone XL crude pipeline, which is expected to move heavy crude and start at the end of 2020, according to Genscape production and pipeline data.
Comparatively, during the first quarter of 2017, about 140,000 bpd was sent via crude-by-rail from Western Canada, said the Canadian Association of Petroleum Producers last month in its 2017 crude oil forecast report. In July, Western Canada heavy production is estimated to be 2.456mn bpd, slightly less than takeaway capacity of 2.522mn bpd, according to Genscape. However, by the end of the year, the production-to-takeaway balance should remain close to parity until output is expected to increase to more than 2.6mn bpd in March 2018, while takeaway capacity remains the same.
Part of the oil sands growth story will be attributed to the December 2017 startup of the Suncor Fort Hill’s project in northern Alberta that is expected to ramp up over the next year to 194,000 bpd of production, according to Genscape.
In 2019, two additional pipeline projects are expected to bring additional takeaway capacity for oil sands shippers: Enbridge’s AB,-to Superior, WA, Line 3 pipeline replacement project, and Kinder Morgan’s Alberta-to-British Columbia, Canada, Trans Mountain pipeline expansion.
First, in January 2019, the Line 3 pipeline replacement project will increase the line’s capacity by 390,000 bpd to about 760,000 bpd. However, Enbridge’s Line 3 pipeline should carry about 20 percent heavy and 80 percent light and intermediate crudes based on public company comments and heavy production expectations, which will not give much relief to heavy crude takeaway capacity constraints.
Next, the Trans Mountain pipeline is to expand by 300,000 bpd to 890,000 bpd in December 2019, when regional heavy production should reach 2.95 bpd, according to Genscape’s Canadian Crude Production Forecast.
The Western Canadian heavy production-to-pipeline takeaway imbalance should narrow after these pipeline projects come online, but more than 100,000 bpd of crude could move on rail until the potential startup of Keystone XL in October 2020. According to Genscape’s analysis, in a scenario without Keystone XL, incremental rail barrels could again reach close to 240,000 bpd.
For Keystone, TransCanada is awaiting for a route approval from the Nebraska Public Service Commission, which was submitted in mid-February. The company does not expect construction to begin on the pipeline project until sometime in 2018. Genscape’s forecast assumes that TransCanada’s proposed 1.1mn bpd Hardisty, AB,-to-Saint John, NB, Energy East pipeline will start after 2021.
Mothballed terminals finding utility again
Currently, rail loading facilities in Western Canada are about 610,000 bpd underutilized based on CAPP data, including a total regional capacity at near 754,000 bpd. Those rail facilities could quickly go to work, sending unit trains of viscous heavy crude in heated rail cars or mixed with diluent in non-heated tank cars to all regions of Canada and the United States.
It is a scenario that could play out like the North Dakota Bakken shale boom several years ago, in which exploration and production companies reacted to growing light sweet crude output and a deficit of outgoing pipeline capacity by loading crude onto rail cars to reach refining markets. Years later, players shifted to relatively cheaper pipeline transport as it became available and lower transportation cost waterborne imports, leaving many crude-by-rail loading and unloading facilities to collect dust.
Foreshadowing an emerging rail trend, significant Canadian crude-by-rail player USD Partners recently purchased from EOG Resources a dormant Bakken rail unloading terminal located about 25 miles south of the Cushing, OK, storage hub in Stroud, OK. USD intends to convert the rail facility to receive heavy crude from its crude-by-rail loading facility in Hardisty, AB.
EOG was an early mover in crude-by-rail, sending the first shipment from its Stanley, ND, loading terminal to Stroud in late 2009. No crude trains have arrived at Stroud since July 6, 2015, according to Genscape, which monitors volumes received at the terminal. Genscape has observed that Bakken-by-rail movements slowed in recent years due to pipeline connectivity from the play and shrinking rail arbitrage margins.
Genscape also monitors crude-by-rail volumes at USD Hardisty, Cenovus Bruderheim, and Kinder Morgan–Imperial Edmonton terminals.
During the first four months of 2017, rail loadings at the monitored terminals in Alberta averaged 81,000 bpd, reaching 97,000 bpd in March before declining. Sources attributed the loadings decline to lower production, a narrower Western Canadian Select (WCS) differential and the fire at the Syncrude Upgrade near Fort McMurray, AB, in mid-March.
In 2016, loadings at the three terminals averaged about 48,000 bpd, increasing to average 76,000 bpd in the last quarter of the year.
The WCS differential was assessed by Genscape on average about $15.65/bbl below the West Texas Intermediate Calendar Month Average (WTI CMA) in December 2016, and $13.94/bbl on average under WTI CMA in 2016 overall. Since April, the WCS differential has been assessed at an average $9.88/bbl below WTI CMA.
Genscape’s Canadian Crude Oil Production Forecast uses a highly detailed bottom-up approach that examines the most significant oil producing areas in Canada providing a detailed production forecast and analysis. The report incorporates provincial well level data along with oil sands in-situ project and upgrader level data to provide the most accurate and detailed driven supply forecast report on the market. Click here to learn more about the Canadian Crude Oil Production Forecast.
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