Canadian heavy sour crude discounts are poised to narrow in 2023 as additional pipeline capacity helps de-bottleneck infrastructure strained by record-setting oil sands production.
Alberta's oil sands producers have now surpassed pre-pandemic levels, leading to excess capacity on Enbridge's 3mn b/d Mainline resulting from the completion of the Line 3 Replacement Project (L3RP) dissipating. Shippers now look to the completion of the Trans-Mountain expansion (TMX) project to draw nominations away from the 3mn b/d Mainline and alleviate pipeline congestion.
The additional arbitrage opportunities created by TMX project and increased pipeline space on the Mainline will push Canadian heavy crude prices higher, as record supply encounters demand from new markets.
The TMX project — expected to be complete in the third quarter 2023 — is set to add 590,000 b/d of capacity to the pipeline, up from its current capacity of 300,000 b/d.
Production in the Alberta oil sands continues to climb, as many companies indicate their commitment to major projects. Production of bitumen, the heavy crude associated with the oil sands, reached record levels of 2.19mn b/d in September, eclipsing the record set the previous month. The most recent production data shows bitumen production of 2.15mn b/d in October, up from 1.99mn b/d in the same month a year prior.
An increased supply of Canadian crude, coupled with limited pipeline infrastructure, has pushed Canadian heavy sour crudes to deep discounts against the basis. Over the course of the January trade cycle, Western Canadian Select (WCS) was assessed at an average of a $28.15/bl discount to Nymex WTI CMA. The discount for WCS had averaged $17.53/bl in the January trade cycle a year prior.
Deep discounts for Canadian heavy sour grades and pipeline apportionment places additional pressure on crude-by-rail, which is less economical than pipeline transportation for shippers with no crude-by-rail commitments. This pressure may be short-lived, however, as the completion of the Trans-Mountain expansion project opens the door to Canadian crude exports to Asia as an alternative to crude-by-rail transportation. The Trans-Mountain expansion may aid or supplement crude-by-rail's traditional role as a relief valve when pipeline congestion is high.
Additional pipeline capacity from the L3RP initially helped to reduce Alberta crude inventories. Closing inventories of 80.6mn bl in October 2021 declined to 66.2mn bl by January 2022 close as new pipeline capacity allowed for a drawdown of inventories. Since January, inventories have remained at similar levels, with October closing inventories of 66.4mn bl. Inventories averaged 65.1mn bl in the first 10 months of 2022, down from an average of 74.8mn bl across 2021.
Apportionment on Enbridge's 3mn b/d Mainline system declined steadily after the completion of the L3RP in October 2021, as the project effectively added 370,000 b/d of capacity to the 760,000 b/d line, which had been running at reduced capacity for safety considerations. Five consecutive months of excess pipeline capacity ended in August however as nominations were apportioned by 2pc. Apportionment has risen since then, up to 11pc for heavy grades and 13pc for light grades for December volumes.
Pipeline congestion has also pushed discounts for Canadian heavy grades in the US wider. When July was the prompt month, the discount for WCS at Cushing, Oklahoma, averaged $9.41/bl to the Nymex WTI CMA basis. This was the final month of excess pipeline capacity before apportionment returned. When October was prompt, Enbridge apportioned nominations for the third consecutive month, and the discount for WCS at Cushing had steadily widened to $13.05/bl.
The wide discounts for Canadian heavy sour grades in Canada and the US are supported by record production and limited pipeline infrastructure to transport crude. Apportionment on Enbridge's Mainline typically supported crude-by-rail movements but the completion of the Trans-Mountain expansion in 2023 will give shippers access to new markets, reducing the demand for space on the Mainline, reducing demand for crude-by-rail, and opening up arbitrage opportunities in Asia.
