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March 2019

Vol. 24, No.11 Week of March 17, 2019

Producers in ‘purgatory’

Hopes for Alberta’s oil sector take fresh blow as Line 3 startup stalled again

Gary Park

for Petroleum News

Alberta oil producers have been driven even deeper into “purgatory,” as one analyst describes the sector’s condition, with word from Enbridge that operation of its C$9 billion Line 3 pipeline from Alberta to Wisconsin will likely be extended by another year to late 2020.

The latest setback for Line 3, which is designed to rebuild capacity to 760,000 barrels per day from the current 370,000 bpd, follows word from the state of Minnesota that its permits scheduled to be delivered in the second quarter of 2019 won’t be finalized until after October which in turn delays the issuance of federal permits.

That shortfall of 390,000 bpd in transportation capacity out of Alberta adds to the continuing uncertainty over TransCanada’s 830,000 bpd Keystone XL line and the 500,000-bpd expansion of the Trans Mountain pipeline.

Rail shipments

As a result, analysts have estimated that shipments by rail will probably rise above 500,000 bpd from the record 340,000 bpd in December.

The blow to Line 3’s construction schedule came barely two weeks after Enbridge officials told a conference call the project was “full steam ahead ... on the remaining execution phases” and should come on stream this year.

Line 3, which will connect in Wisconsin with pipelines to the U.S. Gulf Coast, is supported by producers along its route and Minnesota’s Public Utilities Commission, said Enbridge Chief Executive Officer Al Monaco.

“The line is critical and it has massive support,” he insisted.

Kevin Birn, with the consulting firm of IHS Markit, told the Calgary Herald that Western Canada does not have “available pipeline capacity to move what we (can produce), so it’s going to have to go on rail.”

He said that plight makes the Alberta government’s plan to lease 4,400 crude tanker cars “more needed today than before.”

Birn estimated Alberta’s production currently exceeds takeaway capacity by up to 350,000 bpd.

Scotiabank commodity analyst Rory Johnston said in a note to clients that a replay of “last year’s blowout sale of Canadian crude” may even force the Alberta government to extend its production curtailment order through 2020.

“We expect that at full, uncurtailed production capacity the call on oil-by-rail services in Western Canada will surpass 500,000-600,000 bpd by mid-2023 before Line 3 can enter service,” he said.

Diana Millington, vice president of research at the Canadian Energy Research Institute, and Edward Jones analyst Jennifer Rowland shared the view that Alberta’s production cuts could stretch well into 2020.

Rowland warned that could further eat into capital spending, with companies already “hesitant to make growth investments in Canada.”

Oil-by-rail capacity issue

ARC Energy senior director Jackie Forrest said producers and the Alberta government have cumulative capacity in oil-by-rail contracts of 600,000 bpd - more than enough to clear the market in 2020.

She said companies may not use all of that capacity, although she does expect oil-by-rail volumes to top records set in 2018.

However, Forrest doubts the delay in completing Line 3 will have a significant effect on the discounts between Western Canada Select heavy crude and the West Texas Intermediate benchmark.

Mike McKinnon, a spokesman for Alberta Energy Minister Marg McCuaig-Boyd, agreed the Line 3 delay is a setback but expressed confidence the project will be completed.

“As we lead the charge for pipelines, this kind of uncertainty is exactly why we have a plan to move more oil by rail until new pipelines are built,” he said.

McKinnon called on Jason Kenney, leader of the United Conservative Party and favored in the latest polls to unseat Rachel Notley in the upcoming Alberta election, to “stop his reckless attempt to sabotage (the crude-by-rail plan) for his own political self-interest.”

Kenney has been adamant that the rail strategy is too risky, claiming every one of the industry officials he has talked to believe the Notley government “got completely hosed” in its deal with Canada’s two major railroads.

He said it appears Alberta has “overpaid by something like 100 percent” based on its estimated service, leasing and other related costs of C$3.6 billion.






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