NORVAL SCOTT
Globe and Mail Update
September 9, 2007 at 9:23 PM EDT
CALGARY — A lack of pipeline capacity to take Canadian crude to refineries in the United States between now and 2009 will increase competition for producers to get their output to market, according to a new report from energy industry consultancy Purvin & Gertz.
And the constraints could result in apportionment, an unpromising scenario where there's not enough infrastructure in place to take all production to market, creating both lower prices and higher price volatility.
Consequently, producers could delay some oil sands projects to try to ensure they don't have to discount their future output to guarantee it gets to market, said Tom Wise, executive vice-president at Purvin & Gertz.
“We do see growth in Canadian production, but the pipelines are full and we could see apportionment,” he said in an interview.
“Responsible producers are looking at how much production they can move to market, and are gauging their projects accordingly.”
Purvin & Gertz estimates output from the oil sands will grow to slightly more than three million barrels a day by 2015 from 1.2 million barrels currently as new projects are brought on stream.
While the target does reflect the dynamic growth expected in Alberta, it's not as aggressive as other forecasts. For example, the Canadian Association of Petroleum Producers, an industry body, forecasts production of 3.4 million b/d by the same date.
The threat of apportionment could ease by 2010, when a major pipeline – such as Enbridge Inc.'s Alberta Clipper or TransCanada PipeLines Ltd.'s Keystone projects – is expected to come on stream, relieving the congestion, Mr. Wise said.
Aside from the problem of moving supplies to market, the other headache for producers is whether they can find a market at all for their extra production of heavy crude, or bitumen, from the oil sands, given that the output is difficult to process and can be taken only by certain refineries. However, that's not as big a concern as the pipeline situation, as refiners in the U.S. Midwest – main market for oil sands output – are adapting their operations in step with output increases to take more Canadian supplies, Mr. Wise said.
U.S. refiners will spend about $18-billion (U.S.) until 2012 making changes to their operations, with a fair proportion of that figure going toward configuring refineries to take advantage of the increased availability of Canadian heavy output, he said. “Heavy crudes have the lowest price, and refineries have the opportunity to run those if they're willing to make the investment in hardware.”
However, with refiners making the necessary changes to take more Canadian heavy, there won't be as much demand for upgraded Canadian light, sweet synthetic crude, resulting in increasing discounts for such blends against benchmarks like West Texas Intermediate, Mr. Wise said.
While that doesn't necessarily mean that building expensive upgraders (which remove the heavier parts of a barrel of crude to leave a lighter, more desirable product) isn't cost-effective, “in today's rather heated market investing more capital in Alberta does seem to be questionable,” Mr. Wise added.
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