https://www.nationalobserver.com/2019/01/04/news/pipeline-shortfall-not-only-thing-punishing-canadian-oilpatch
Pipeline shortfall not the only thing punishing Canadian oilpatch
By Carl Meyer in News, Energy, Politics | January 4th 2019
[A manufactured 'crisis' by the foreign owners of the 'Canadian' oil
industry lives on in the minds of the disinformed 'Alberta-think'
rank-and-file who continue bleating their programmed chants despite the
fact that the price of dilbit has returned to historic discount levels,
and that national unemployment is at all time lows, while the oil
industry continues to cut jobs while preparing to ramp up production in
the spring of 2019.
The increase in oil production finally outstripping pipeline capacity
and the industry decision not to invest in updated rail tanker cars and
support infrastructure are industry management decisions, not failures
on the part of governments, which continue to pour billions of texpayer
dollars into the bitumen sector annually via purchases and construction
of infrastructure, relaxing environmental rules and providing other
subsidies and tax/royalty breaks. Interestingly, the industry has
turned up its nose at loans from the federal government, and continue to
ramp up the rhetoric to pressure the government to simply hand over more
money without conditions in order to fatten industry profits.
A question the industry has not yet answered is why pipeline capacity
fell during 2018.
links and useful graphics in online article]
A lack of pipelines isn't the only thing that has been choking Alberta's
oilpatch, Canada's energy regulator says.
The National Energy Board (NEB) has released a report that clarifies
what has plagued fossil fuel companies in the oil-rich province over the
past year. The economic turmoil persisted as the industry ramped up
production in a market with buyers who are paying far less for Alberta
crude than what they pay for other petroleum products.
The report said that maintenance and production woes at U.S. refineries
were also a key factor affecting the market price for oil produced in
Canada, which is home to the world's third largest reserves of crude
after Saudi Arabia and Venezuela.
“Demand for crude oil comes from refineries,” the NEB makes clear in its
report, released Dec. 27, 2018. Canada depends on U.S. refineries to
process its oil, because "three-quarters of the crude oil produced in
western Canada" is heavy oil with high amounts of sulphur, yet Canada’s
refineries are “largely configured to process light crude."
The largest U.S. refinery purchaser of Canadian heavy oil in the
country, BP's Whiting Refinery near Chicago, had a maintenance shutdown
last year. The refinery buys roughly 250,000 barrels per day of Canadian
crude, according to the Canadian Press.
The new NEB analysis comes at a time when some conservative-leaning
politicians have been using the gloomy market reality to attack the
left-leaning NDP government in Alberta and the federal Liberal
government in Ottawa for failing to fix the problem.
While refiners in the U.S. have invested in equipment to process heavy
crude, the board noted, until recently there was no refinery in Canada
built specifically for this purpose. There is some capacity at other
refineries — Suncor’s Montreal Refinery processed on average 24,300
barrels per day of diluted bitumen, an oilsands product, in 2017.
But the new $9.7-billion Sturgeon Refinery near Edmonton, the first
purpose-built for heavy oil, was still in its final stages of startup
last month.
The board highlighted data showing how the amount of Western Canada
crude oil available for export has only recently exceeded available
pipeline capacity, even as the amount of oil available to export more
than doubled since 2010.
Available capacity remained steadily above available crude from January
2010 until September 2018. Meanwhile, crude available for export went
from under two million barrels per day, to over four million barrels per
day.
Put another way, if Canada's crude oil available for export had not
grown as much as it did over the last eight years, pipeline capacity may
not have become as much of an issue as it is today.
The report represents the first part of the board's response to a Nov.
30 request by Natural Resources Minister Amarjeet Sohi for “advice” on
options to optimize oil exports. It said it sees the report as a
"backgrounder" in support of more work to be conducted in early 2019.
As a result, after publishing the report, the NEB launched an online
forum to seek public input. It plans to meet this month with oil and gas
companies, pipeline operators, governments and others to seek input on
questions posed by the minister.
Sohi says report shows need for new pipelines
When Alberta Premier Rachel Notley ordered a crude oil production cut of
roughly 8.7 per cent in early December, both federal Conservative Party
leader Andrew Scheer and provincial United Conservative Party leader
Jason Kenney raised the issue of pipeline capacity as central to the issue.
Throughout the second half of 2018, the province faced an unusually
large discount on crude bitumen from the oilsands — a heavy oil that
gets blended with other Canadian oil products to form a benchmark price
called Western Canadian Select (WCS) — relative to another North
American crude benchmark, West Texas Intermediate (WTI).
That “decline in the value of Alberta’s resource” was due to a lack of
pipelines, Scheer said last month, a “direct result” of Prime Minister
Justin Trudeau’s “failures on several major pipeline projects.” Kenney
said at the time of Notley’s production cut that it was "more important
than ever" to make sure the Trans Mountain pipeline expansion project
and TransCanada's Keystone XL pipeline are built.
Kenney was a federal cabinet minister for several years when the
government of former prime minister Stephen Harper was in power, failing
to get Enbridge's Northern Gateway pipeline to the west coast of B.C.
Harper also failed to convince former U.S. president Barack Obama to
approve the Keystone XL pipeline to Texas.
Scheer was a Conservative MP under Harper, during those years, serving
as speaker of the House of Commons from 2011 to 2015.
Sohi's NEB letter also refers to future pipelines — the Enbridge Line 3
replacement pipeline and the Keystone XL pipeline — as likely to fix
“current transportation challenges” over the long term. Line 3, once
completed, would ship oil from Hardisty, Alberta to Superior, Wisconsin,
while the TransCanada project would send more Canadian oil to the Gulf
coast of Texas.
Alberta officials have said the province, which currently produces 3.7
million barrels per day of raw crude and bitumen, is generating 190,000
barrels per day more than it has the ability to ship by pipeline or
rail, and storage tanks have become full.
Recently, oil prices have remained elevated, with the price gap sitting
at about $12.50 USD per barrel on Jan. 2.
Asked for the minister's reaction to the report, Sohi's press secretary
Vanessa Adams thanked the regulator for its work and said the report
provided "further evidence for the need to build new pipelines."
"Since day one, our government has been working to support our oil and
gas sector and the jobs it creates by making market access a priority,"
said Adams on Jan. 4.
"It’s why we approved the Line 3 replacement project, which will come
online in 2019, and have always supported Keystone XL. It’s also why we
made a $4.5 billion investment in Alberta’s energy sector with the Trans
Mountain pipeline, and why we are moving forward on the expansion
project in the right way through meaningful consultations."
Oil production grows, but pipeline capacity constant
The board's report says the "primary factor" behind the price gap was a
"growing supply of Western Canadian oil production" to 4.3 million
barrels per day in September 2018, while "takeaway capacity on existing
pipeline systems remained constant" at roughly 3.95 million barrels per day.
But it also says “refinery maintenance in the U.S. Midwest, the largest
export market for Canadian heavy crude oil, led to a significant
reduction in demand for Canadian oil."
Both of these factors "contributed to a backlog of Canadian crude oil,
higher levels of oil in storage in Alberta, and a lower price for
Canadian crude oil," the report stated.
Last month, Notley issued a call for proposals to build or expand oil
refineries either in Alberta, or connected with provincial oil
production. Proposals are currently being accepted until Feb. 8, and can
be for either new builds or expansions to existing sites.
In his earlier comments, Kenney also noted that the oil price was being
forced down by “market manipulation by traders and commodity markets to
create the problem of so-called air barrels.”
He was referring to complaints from some industry stakeholders that a
major Canadian oil pipeline was running below capacity, due to a flawed
regulatory system that was preventing some shippers from getting all the
space they needed to send their product to market.
In his own open letter to the NEB, Sohi acknowledged that pipeline
capacity “appears to be” constrained by “apportionment levels,” which is
a technique of reducing space that pipeline operators use when there is
more oil to transport than available space, as well as the growth of
oil-by-rail.
He asked the board to consider whether the monthly process to portion
out space on oil pipelines was “functioning appropriately” and
consistent with the law, and whether there were any “short-term steps”
to maximize rail capacity.
The NEB report does say that the average percentage of apportionment
increased in 2018. But it does not include the “air barrels” phenomenon
in its analysis of the “recent market events” resulting in the price gap
this fall.
Oil being discounted on 'quality,' transport costs
Canada was the fourth-largest crude oil exporter in the world in 2017,
the NEB said, exporting 3.3 million barrels per day. Canadians are also
one of the top 10 oil-consuming nations in the world.
The globally accepted scientific consensus is that humanity must
severely cut back on its production and consumption of fossil fuels like
oil, natural gas and coal, which emit carbon pollution that collect in
the atmosphere, trapping heat and warming the planet.
The Intergovernmental Panel on Climate Change says the planet has less
than 12 years to take action to reduce pollution to levels that avoid
heightened risk of severe floods, droughts, extreme heat and poverty.
Carbon pollution is causing significant and irreversible damage to
ecosystems, and will disproportionally impact the poor, degrade human
health and lead to water scarcity, according to a
Congressionally-mandated report released last year, involving a wide
range of U.S. government agencies and departments. The report projected
that climate change will cost the U.S. economy hundreds of billions of
dollars.
Forms of energy that pollute less will eventually need to become the
dominant form of primary energy for industrial, commercial and personal
use. No more than one-third of proven reserves of fossil fuels can be
consumed prior to 2050, the International Energy Agency has concluded
based on peer-reviewed evidence, unless carbon capture technology is
deployed.
The majority of crude oil produced in Canada is from the Western
Canadian Sedimentary Basin, an area stretching over almost all of
Alberta and some of Manitoba and Saskatchewan. Most of that production
is a heavy oil that is high in sulphur.
Even before the widening price gap this fall, Western Canadian Select
typically traded at a discount to West Texas Intermediate. Between 2015
and 2017, the difference between the two crudes averaged $12.95 USD per
barrel.
WCS is priced relative to WTI because Western Canadian oil crude is
refined in the U.S., and "Canadian crudes are commonly priced relative
to crude oils in the markets where they compete for refining capacity,"
the report stated.
The board said "two major components comprise the oil price differential
in a balanced market," namely a difference in "quality," and
transportation costs.
"Heavy crudes are lower quality than light crudes because they yield a
lower amount of high value end-products, like gasoline and diesel," said
the board. "Heavy crude oil is also more costly to refine compared to
light crude oil."
As well, crude oil with more sulphur, which Canada produces, "require
additional refining steps and costs."
The two types of crudes also have different transportation costs built
in to their price, said the regulator.
"Crude oil that is physically located closer to major refinery regions
will sell for more than crude oils located further from refineries. This
price difference reflects the additional cost to transport the crude oil
to the refineries."
Mainline 'inherently' harder to run at capacity
Notley’s production cut is expected to last until Alberta's storage
tanks have been drawn down, a process that is projected to take about
three months, after which the amount of production being cut will be
reduced.
Unlike the production cut, however, provincial officials say Notley's
plan to boost the amount of oil that moves by rail will take longer to
kick in, with the first 15,000 barrels of extra rail capacity available
starting December 2019.
Oil is currently taking up a bit more than six per cent of rail freight
volume in Canada, but rail capacity can't be brought on quickly,
according to the energy regulator, unless appropriate loading and
unloading infrastructure, train crews, and specialized tank cars already
exist and are ready to be deployed.
In the meantime, "companies wishing to transport their oil production by
rail are competing for rail space with many other commodities," the NEB
wrote.
As for the "air barrels" issue, the regulator noted that the Enbridge
Mainline, the largest crude oil transportation system, is "inherently
more difficult to operate at full capacity because of size and system
optimization complexities."
It said it would explore that issue further in its next report to Sohi.
The board also noted that when apportionment occurs, some shippers can
"engage in trades in the secondary market." That might "add complexity
to the nomination process and the subsequent operation of the pipeline,"
it said.
Oilpatch player Canadian Natural Resources raised concerns on Dec. 5 of
a “dysfunctional pipeline nomination process." Enbridge told analysts
that month it would boost its capacity by as much as 100,000 barrels per
day by the middle of 2019 and review how it runs its central pipeline,
the Mainline.
The company told media in November that the Mainline “is essentially
full” and that "there is no material capacity to be gained by changing
the apportionment and supply verification procedures.”