Discounts on oil sands barrels to persist until pipeline capacity is added
Since 2015 the volume of oil sands exports to the U.S. Gulf Coast has been growing in average at approximately 100 mbd every year replacing Latin American exports of heavy crude grades. However the Canadian quality benchmark price for oil sands production, the West Canadian Select, still carries a larger discount when compared to the Maya crude grade that is also exported to the US Gulf Coast.
“Securing access to U.S. refining markets is just the easiest plan in the shorter term and diversifying to Asian markets seems a reasonable longer term strategy,” says Adrian Lara, an oil and gas analyst at GlobalData. “In spite of this strategic anticipation from both Canada’s government and oil sand operators, until the new pipeline capacity is built Alberta’s heavy crude oil production will remain subject to logistic constraints and relatively large price discounts.”
Moving ahead with the 830 mbd Keystone XL pipeline will certainly establish a better price formation for the increasing oil sands demand in the gulf coast.
Canada’s existing oil pipeline and railway capacity is enough to support oil sands current exports but with little extra room for logistic constraints. Presently, there are at least three announced pipeline projects that will serve different markets and hence can support the diversification of exports and better pricing of oil sands production.
The three announced pipeline projects are the Trans Mountain expansion project adding 590 thousand barrels per day (mbd) of capacity, the Enbridge Line 3 replacement adding 370 mbd of capacity and the Keystone XL project adding 830 mbd of capacity.
“Once in operation the total pipeline capacity will be at a surplus even in a high case scenario for oil sands in which production surpasses 4 million barrels per day (mmbd) by 2025,” says Lara. “This additional takeaway capacity will certainly provide the flexibility to minimize the pricing impact of any transportation bottlenecks.”