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Oil pumping unit in the Saskatchewan prairies, Canada.

Keystone delay heralds long-term pain for Canadian oil producers

CALGARY, Alberta – A further delay or outright rejection of the TransCanada Corp Keystone XL project risks a looming capacity crunch on Western Canada’s pipeline network, causing more pain for producers already struggling with weak global crude prices.

In the latest twist in the seven-year Keystone XL saga, TransCanada on Monday asked the U.S. State Department to pause its review of the permit, a move seen pre-empting a possible rejection by U.S. President Barack Obama.

On Tuesday the White House said Obama wants to make a call on the project by the end of his presidency.

An outright rejection would be a death knell for the pipeline intended to ship 830,000 barrels per day of oil sands crude to Nebraska and the U.S. Gulf Coast. Even if the requested seven- to 12-month pause is granted, and permits are received, the pipeline looks unlikely to start before 2019 at the earliest.

By then Western Canadian supply, including the portion of U.S. Bakken crude transported on Canada’s pipeline network, will likely have risen to 4.5 million to 5 million barrels per day, according to the Canadian Association of Petroleum Producers.

Current takeaway capacity on the system is just over 4 million bpd and planned expansions by Enbridge Inc to its Mainline system will bump that up to around 4.4 million bpd, leaving rail to fill the gap.

Meanwhile, other export pipeline proposals including TransCanada’s Energy East and Enbridge’s Northern Gateway look no closer to getting approved.

Related: U.S. will not pause Keystone review; Obama expected to reject

The looming crunch would look a lot worse if not for the global crude price collapse, which has slowed oil sands and Bakken crude growth. Even so, it clouds the outlook for oil sands producers, which have some of the highest production costs globally as well as land-locked crude.

“There’s less of a pinch point because of the reduced production growth but there’s still the need for additional pipeline,” said Judith Dwarkin, chief energy economist at ITG Investment Research.

As well as market access issues, investors face weak oil prices, high project breakeven costs, and royalty rate and climate change policy reviews from the Alberta government.

Last week Royal Dutch Shell Plc canceled its 80,000-bpd Carmon Creek oil sands project, citing lack of infrastructure to move Canadian crude to market, as did Statoil in 2014 when postponing its 40,000-bpd Corner project.

“Market access is a serious concern. It’s absolutely front and center of any producer’s mind when they commit to a multi-billion dollar project,” said Sonny Mottahed, chief executive officer of boutique investment bank Black Spruce Merchant Capital, adding more projects could scrapped because of the Keystone XL delay.

In recent years pipeline bottlenecks in Alberta, the largest source of U.S. crude imports, have at times blown the discount on Canadian heavy crude out to more than $40 a barrel. With U.S. crude languishing around $45 a barrel, many producers cannot afford another capacity crunch.

“We would certainly like to see better market access because there are pricing impacts on constraints to reaching markets,” said Brad Bellows, a spokesman with oil sands producer MEG Energy.

The delay validates moves by producers like Imperial Oil Ltd and Cenovus Energy, who invested in their own crude-by-rail terminals.

However rail is roughly $5 per barrel more costly than pipeline and takes a larger chunk out of producer profits.

“As you can see from third-quarter earnings many companies are losing money on production so that $5 becomes crucial,” said ARC Financial analyst Jackie Forrest.

(Editing by Lisa Shumaker)

This article was from Reuters and was legally licensed through the NewsCred publisher network.

7 comments

  1. So it can be transported by Warren buffets railcars!

    • Chris research how little Alberta tar crude has been transported to Tx via rail in the last 7 yrs—
      Simple math crys bull– project through put 840,000 bpd, tank car 750 bbls = 1,200 tank cars/ 18 miles of trains each and every day. Round trip logistic 5,000 tank cars minimum @ $15,000 ea = $75 Mn investment for a project that the price of oil has shut down

  2. The worst way to transport oil.


  3. The K-XL was nothing more than a Canadian export scheme–
    THINK- in the seven yrs that it has been delayed not once has it been needed, not once has Canada had any problem making deliveries of their crude to US refineries —
    Over 50% of all crude imported into the US comes from Canada and Canada has no other customer they can export to. With another customer Canada would not have to discount their exports to the US.
    AND when the US ban on exporting is lift exports from canada ould be in competetion with US exports for market share.

    • What a Dummy. How many times do you have to be told that exporting to a third country was never a motivation to complete K-XL? If Canada wanted to export from Texas ports, they could do so TODAY, up to 1 million bpd. All Canadian crude entering the US is refined in the US. It will always be so.

    • You foolishly think that Canadian exports would compete with US exports. THINK, old man! Canadian crude is very heavy, while surplus US crude is very light. They would not compete because they would go to different buyers.

    • Canadian crude is discounted because it’s HEAVY. There’s no other reason to discount since it’s not landlocked. If US refineries were not bidding high enough, then Canada could export from Nederland or Freeport TX any time they wanted.