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Capline reversal boon to Canadian oil sands in moving crude to Gulf
Gary Park for Petroleum News
Having seen two of their hoped-for outlets to Asian markets scuttled by the Canadian and U.S. governments, Alberta oil sands producers have seized an overlooked alternative route.
They have quietly and suddenly taken advantage of Ohio-based Marathon Pipe Line’s reversal of its Capline system that previously was the largest south-to-north pipeline from Louisiana to the Midwest, with capacity of 1.3 million barrels per day.
Faced with declining imports from Mexico and Venezuela, Marathon has been working since 2017 to open a connection for heavy and light crude (including oil sands bitumen) from the Midwest storage hub to the Gulf Coast refining center.
Matt Smith, an oil analyst at Kpler, said that as a result Canadian exports out of the U.S. Gulf “should continue to show strength” by allowing those producers to become a beneficiary of the “changing dynamics” since the tanking of Venezuela imports and the prospect of more Mexican crude being removed from the U.S. market.
The initial statistics by Kpler show that volumes of heavy crude on Capline averaged 260,000 bpd in December and 180,000 bpd for all of 2021.
Canadian shipments up Of that total, Canadian shipments on Capline rose from 25,000 bpd in 2018 to 70,000 bpd in 2019 and 2020, a small fraction of the 4 million bpd exported from Canada to the U.S.
As yet, there is no indication from Marathon on when the reversed Capline will move from its current volumes of light crude to large volumes of heavy crude.
Randy Ollenberger, a BMO Capital Markets analyst, said he expects Capline to shrink the discounts for the benchmark Western Canada Select crude from the oil sands relative to West Texas Intermediate to about US$10 per barrel, resulting in a strong impact on the bottom lines of Canadian producers in the second quarter of 2022, according to a Financial Post survey of producers.
Grant Fagerheim, chief executive officer of Whitecap Resources, said his company is eying the use of Capline because of the “insurance” it offers by accessing a diversity of markets in the U.S. Midwest and Gulf Coast.
Credit rating agency Fitch expects the new Capline routing will draw crude from Canada, North Dakota and the U.S. Mid-Continent.
Routes to get there To use Capline, Canadian producers need to ship their crude on Enbridge’s Mainline to the U.S. Midwest, then switch to Enbridge’s Southern Access line that feeds into the Patoka, Illinois, storage hub, which ties directly into Capline and a clear run to the Gulf Coast.
The Capline has come on stream at the same time Enbridge’s Line 3 replacement has offered 760,000 bpd of capacity to a wide swath of outlets in the U.S.
The Capline shipping rates range from US$1.75 per barrel for shippers committing to move more than 100,000 bpd on the line to US$3.75 for those operating on a spot basis.
Whoever benefits from Capline, the line reversal has partly bailed out producers who were left reeling when the Canadian government in 2016 officially rejected Enbridge’s Northern Gateway project to ship 520,000 bpd to a Kitimat tanker terminal on the British Columbia coast, along with President Joe Biden’s scuttling last year of the 830,000 bpd Keystone XL project.
Martin King, senior analyst with RBN Energy, said that if nothing else the new Capline will “certainly help to keep the price differentials (between WCS and WTI) tighter than what we’ve seen in the past because you’ll have more egress optionality out of Western Canada.” He estimated the differential could trade in the range of US$12-US$15 a barrel. That compares with as much as US$30 in past years.
- GARY PARK
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