Feature: Ample Canadian crude pipeline, rail export capacity exists if output rises

As crude oil prices have surged, so to has a renewed emphasis on North American energy security and the need for the US to lean more on volumes from the Canadian oil sands.

Energy executives and analysts acknowledge there now exists ample pipeline and rail capacity to move additional barrels from Alberta into US refining hubs, even without the infamous Keystone XL Pipeline project that President Joe Biden effectively canceled.

A handful of competing pipeline projects and expansions recently ended the longstanding Canadian pipeline bottleneck into the US, easing the flow of the heavy Canadian barrels desired by many US refineries.

Pipeline capacity tightness could still emerge in early 2023 -- if Canadian production rises by 300,000 b/d or so as projected -- but it would only be expected to last for a few months until Canada's delayed expansion of the Trans Mountain Pipeline is completed in the fall. In the interim, crude-by-rail exports could return to their pre-pandemic volumes temporarily, experts said.

As the US and Canada have banned Russian barrels for the invasion of Ukraine, it has become political theater to allege that the existence of Keystone XL would notably alter North America energy supplies and lower US gasoline prices.

But the reality is much different from the rhetoric, said AJ O'Donnell, product team director for East Daley Capital. The Canadian oil sector is maintaining the same capital discipline as the US shale sector, hiking volumes where it is economical but not announcing any major new projects, he said.

"Without a large change in supply or a shift in capital, we have plenty of capacity to clear the basin," O'Donnell said. "And we have not seen a significant change in tone really."

Canadian crude volumes will rise, he said, but the Permian Basin will still lead North American growth.

Speaking at the recent CERAWeek by S&P Global conference in March, Mark Little, the CEO of large Canadian producer Suncor Energy, said he expects Canadian production to jump by 300,000 b/d or so by the end of 2022. He bemoaned the cancelation of Keystone XL, but he also acknowledged the ability to ramp up crude-by-rail volumes if necessary.

"Everyone is looking for opportunities to debottleneck their facilities," Little said.

S&P Global Commodity Insights is a bit more bullish on Canadian growth. Canadian crude and condensate production is forecast to grow from almost 4.8 million b/d at the end of 2021 to 5.24 million b/d by end-2022 and to 5.45 million b/d at the end of 2023.

Best laid pipeline plans

While TC Energy's Keystone XL made the most news, Enbridge's competing Line 3 replacement pipeline project came online at the beginning of October.

The Line 3 project increased capacity from 390,000 b/d to 760,000 b/d on the Alberta to Superior, Wisconsin leg, while the Southern Access expansion boosted capacity from 996,000 b/d to 1.2 million b/d on the Wisconsin-to-Illinois route.

The expansions upped Enbridge's Mainline network capacity to ship more than 3.1 million b/d across 8,600 miles. Mainline is by far Canada's largest crude transporter and exporter, moving supplies from the Alberta oil sands to the Ontario and US Midwest refining markets. Enbridge said Mainline volumes are expected to average about 2.95 million b/d in 2022, which is on par with fourth-quarter volumes after the new projects were completed.

Enbridge also expanded its Flanagan South Pipeline by 90,000 b/d, bringing the pipeline to about 675,000 b/d of total capacity. The 593-mile pipeline connects to Enbridge's larger Mainline network to move Canadian barrels from Flanagan, Illinois to the Cushing, Oklahoma hub. Then the Seaway Pipeline system stretches from Cushing to the Houston area.

And more Mainline growth is on the table. Enbridge has discussed larger expansions in the past to increase capacity via more drag-reducing agents and pump stations, including adding another 200,000 b/d to the Mainline network; 100,000 b/d to the Southern Access Extension; 250,000 b/d to Flanagan South; and 200,000 b/d to Seaway.

Likewise, more Canadian volumes are moving on the new Capline Pipeline reversal project that entered full service Jan. 1 with volumes of 100,000 b/d. The pipeline currently has a capacity of about 200,000 b/d and excess capacity is available for both contracted and spot shipments, operator MPLX said March 24.

Capline now moves Canadian barrels from Patoka, Illinois to the Louisiana Gulf Coast. MPLX wants to fill up the capacity before considering expansions through the addition of pump stations.

And TC Energy even has the ability this year to increase volumes on the base Keystone Pipeline system through optimization work, which would in turn grow volumes on its Marketlink leg from Cushing to the Texas Gulf Coast.

Then, the east-to-west capacity expansion of the Trans Mountain system in Canada would hike crude capacity to 890,000 b/d from more than 300,000 b/d, with deliveries to the Vancouver region. The Trans Mountain timeline was recently extended from end-2022 to the third quarter of 2023 though. The difference is most new TMX volumes would be exported to Asia, although some would move to the US West Coast and Pacific Northwest, analysts said.

"We will have sufficient pipeline capacity for years to come following the in-service of TMX," said Matthew Taylor, midstream analyst with Tudor, Pickering, Holt & Co. "There are no major oil sands projects planned, and both Enbridge and TC Energy have additional de-bottlenecking that can be done. We see no compelling commercial reasons for KXL to be built at this point in time."

Choo choo choices

Just prior to the global breakout of COVID-19, Canadian crude-by-rail export volumes hit an all-time high of 411,991 b/d in February 2020 because of pipeline constraints.

After bottoming out at 38,867 b/d in July 2020, those rail volumes had only rebounded to 165,136 b/d in September 2021 just before the Line 3 replacement came online, according to the Canada Energy Regulator. The crude-by-rail volumes fell to 132,669 b/d in October and have dipped by slightly more since then through January.

East Daley Capital expects rail export volumes to remain muted in 2022 but jump in early 2023 to as high as 410,000 b/d until the Trans Mountain project comes online -- then plummet again to as low as just 20,000 b/d.

The current additional pipeline capacity has narrowed the price spread for heavy Canadian crude near the source in Alberta and on the USGC. In February of 2020, the price spread for the heavy Western Canadian Select blend in Hardisty, Alberta, and on the USGC reached as high as $21/b, according to data from S&P Global Commodity Insights. The spread was assessed at $7.25/b March 22, far below the $13/b level traders say is needed to incentivize rail.

Some rail projects are fighting to become more economically competitive though. Canadian Pacific Railway is working with partners to currently move about 50,000 b/d of new DRUbit crude, a proprietary heavy Canadian crude oil specifically designed for safer rail transport. CP has a new crude-by-rail terminal in Port Arthur, Texas, to receive the Canadian crude processed specifically for rail travel along the CP and KCS networks.

And even moving more Canadian crude to the USGC by water could theoretically become a more viable option. Illinois-based Ducere said it will start construction this spring on a barge project to transport up to 450,000 b/d of Canadian heavy crude from the Chicago Ship Channel along the Mississippi River to feed refineries in Louisiana and beyond.

"If the economics are there, Canadian crude could move across the water as well," O'Donnell said.