Keystone oil pipeline capacity may be restored next week: company source

The Keystone oil pipeline could return to full capacity next week if the necessary repairs to an electric substation are completed without any major supply chain disruptions for replacement parts, according to a company source.

The 590,000 b/d crude artery from Canada to the US has operated at a reduced capacity since July 17 after vandalism damaged a transformer at an electric substation in rural South Dakota that solely services the TC Energy flagship oil pipeline.

TC Energy has declined to offer any timeline for a return to full capacity. The company declared force majeure on the pipeline network July 18 and has continued operating at a reduced, but unspecified, capacity.

"Our system continues to operate safely at a reduced rate as a result of the incident," the company said in a July 20 statement. "We are unable to further discuss operations as it involves commercially sensitive information. Currently, there is no timeline for completion of repairs and restoration of power service."

East River Electric Power Cooperative, which operates the Carpenter Substation in Beadle County, said a criminal investigation is underway. East River said the damaged transformer was leaking mineral oil when the problem was detected.

"Our crews are working as fast as they can, but I don't have a good timeline at this time," East River spokesperson Chris Studer said July 20.

One market source said that, depending on the length of the outage, this could push differentials for crude oil in Western Canada lower, and lead to significant storage builds as the market depends heavily on Keystone to move crude out of the region.

However, "If it is minor and back up soon ... it will be a non-impact event," the source said.

The pipeline runs from Hardisty, Alberta, through North Dakota, South Dakota and Nebraska, where it splits with one leg moving crude east through Missouri for deliveries into Patoka, Illinois, and the other moving south to Cushing, Oklahoma, and then onto Houston.

Values for heavy sour Western Canadian Select crude have come under pressure already in recent weeks as supply of heavier, sour grades along the US have increased following the release of barrels from the US Strategic Petroleum Reserve.

Crude choices

Because crude oil takeaway capacity leaving Canada already is tight, said AJ O'Donnell, product team director for East Daley Capital, there are only a few alternate ways to move the displaced crude oil if Keystone remains at a lower capacity for longer.

Enbridge's Mainline network into the US potentially could accommodate another 150,000-200,000 b/d in additional volumes into the US, O'Donnell said, and Enbridge's Express Pipeline to Guernsey, Wyoming, could handle maybe 30,000 b/d. However, there are limited ways to move crude beyond the Guernsey hub.

Otherwise, more expensive crude-by-rail exports are the fallback option for shipping the heavy barrels of Canadian crude, he said.

"There's plenty of capacity here (via rail), but it's more expensive and what is available on demand is questionable," O'Donnell added.

WCS in Hardisty, Alberta reached a discount of $22.15/b on July 8, which put it at its lowest assessed value since Jan. 27, 2020, when it hit minus $22.50/b. Values for front-month WCS rebounded slightly in the days since but remained assessed at WTI CMA minus $21.35/b on July 18.

TC Energy has aimed to to move more Canadian volumes -- and US shale barrels -- entirely through its own, 2,700-mile Keystone system, which includes the Marketlink Pipeline. Marketlink Pipeline can move 750,000 b/d from Cushing to Nederland, Texas. The Keystone Houston Lateral provides an additional, 47-mile expansion to Houston markets.