Feature: Stalled North American crude pipeline projects could mean bottlenecks, price discounts

As the Trans Mountain, Dakota Access and Line 5 pipelines continue to face legal and regulatory setbacks, North American crude output is expected to rise, a situation that could lead to bottlenecks and deeper regional price discounts if shippers need to turn to alternative modes of transportation such as rail.

"Pipeline delays add to costs all the way around," independent analyst Tim Evans said. "The costs of the projects go up, but the alternative transportation such as oil by rail also cost more per barrel."

Most recently, Canada's Enbridge on Sept. 11 appealed a US federal court ruling requiring the company to shut its Line 5 pipeline by June 2026 unless a reroute is completed. Line 5 transports roughly 548,000 b/d of light crude oil and natural gas liquids from Superior, Wisconsin, to Sarnia, Ontario. The pipeline supplies "virtually all propane in Ontario and most of Michigan," Enbridge said in its appeal.

Also on Sept. 11, Trans Mountain Pipeline said in a filing that its crude pipeline expansion project could be delayed in worst case scenario by nine months until December 2024 if regulators do not approve a reroute plan.

Trans Mountain plans to expand its capacity to 890,000 b/d from 300,000 b/d, significantly growing the only pipeline system that transports oil from Alberta to Canada's Pacific Coast.

And on Sept. 8, the US Army Corps of Engineers released a draft environmental impact statement that left the fate of the 750,000 b/d Dakota Access Pipeline up in the air. The review offered several options for Energy Transfer's pipeline, including reroutes, which delivers Bakken crude from North Dakota to Patoka, Illinois, where crude can be shipped to the US Gulf Coast via other pipelines.

'Essentially bottlenecked'

These developments come as US and Canadian production is rising. S&P Global Commodity Insights expects US crude production to climb to 13.5 million b/d by December 2024 from roughly 12.9 million b/d currently. Western Canadian crude production is expected to increase to 5.5 million b/d total in December 2024 from 4.8 million b/d currently.

"Without pipeline expansion, growth in crude production is essentially bottlenecked," said Rebecca Babin, a trader at CIBC Private Wealth. "You need both to continue to increase crude production."

While Babin does not expect a Trans Mountain expansion delay or Line 5 reroute to have an immediate market impact, she said "the situation with Dakota Access pipeline is different.

"If DAPL does not receive the easement to continue to operate, there would be a significant market impact," she said.

Crude moved by rail or truck would "come at much higher costs," she said. "Consensus is that DAPL will get the easement, but there is some risk it does not, especially as we enter an election cycle in the US."

Pipeline capacity from the Bakken play is currently at 1.5 million b/d. While the Permian Basin is expected to account for the bulk of the US increase in crude output, Bakken production is expected to rise 100,000 b/d to 1.3 million b/d by end-2024.

Babin noted that while there was available pipeline capacity out of the Bakken, producers may have to resort to moving crude by "rail or truck shipping, but that would come at much higher costs" if the disruptions came to fruition.

"While rail and storage could blunt some of the impact," said Kevin Birn, an analyst at S&P Global, rail companies would likely be seeking "long-term contracts that would complicate the pace at which rail could ramp up."

If producers do resort to transporting crude by rail or other forms of shipment, crude prices may see discounts to account for the higher transportation costs, widening the differential.

Pricing for October barrels of Bakken crude in the Williston Basin for injection into DAPL saw a sharp decrease during the past week. Bakken Williston was last heard trading Sept. 15 at a $1/b discount to the WTI CMA. The location dropped from WTI CMA minus 10 cents/b Sept. 8 to minus $1.45/b Sept. 12 after news that DAPL could possibly be shut following the draft EIS release.

Traders were cautious to directly link the significant price drop to the draft report but did say that the price move lower coincided with the recent news.

Dakota Access Pipeline's long-awaited draft review cites five alternatives to the 750,000 b/d pipeline's original construction, but the Corps of Engineers has yet to decide which alternative route the DAPL should follow in order to meet environmental guidelines, noting that a decision will be made in its final review after considering input from the public, with comments due by Nov. 13.

Multiple federal courts in 2021 allowed DAPL to stay open but maintained that the five-year-old pipeline was wrongly completed without undergoing a thorough EIS. As a result, DAPL's water-crossing easement under Lake Oahe in North Dakota was vacated, essentially allowing the pipeline to keep operating illegally until the EIS was completed.

The pipeline was facing opposition from the Standing Rock Sioux Tribe as well, whose main water source is the Mississippi River.

Traders bearish

The reroute on the TMX expansion is also facing opposition from the Stk'emlupsemc te Secwepemc Nation, an indigenous group whose territory the pipeline crosses. The Stk'emlupsemc te Secwepemc and Trans Mountain Corp. have been in ongoing discussions since 2017 as the reroute could impose on cultural heritage sites belonging to the tribe.

The proposed 0.8-mile reroute south of Kamloops, British Columbia, requires micro-tunneling construction, which is not feasible technically or economically, according to Trans Mountain Corp.

Traders were generally bearish about Trans Mountain, saying the delay was already priced into market values, along with increasing crude oil production in Western Canada, refinery maintenance at BP's 110,000 b/d Whiting, Indiana, plant through October and work being done at Flint Hills' Pine Bend refinery in Minnesota.

"It's tough to say because the market was already pegging [Trans Mountain] to be next summer, so I don't think the news should be that surprising," another trader said, noting that the news hadn't significantly moved prices.

Enbridge's Line 5 appeal specifically challenges a US federal court ruling in favor of the Bad River Band of Lake Superior Chippewa, located on the shores of Lake Superior and Chequamegon Bay. They claimed that Line 5 is crossing over parts of the reservation without permission.

The band has also acquired additional parcels of land, which established the pipeline's operations as a clear public nuisance under federal law, according to federal Judge Willian Conley in June. Conley ordered Enbridge to reroute the line within the next three years, by end-2026, or risk a permanent suspension to operations.

In its appeal, the Calgary-based energy company challenged the district court's decision, citing that "just 12 miles of Line 5 traverse the band's reservation" and said the proposed reroute would not be possible to complete within three years.

Citing the challenges in permitting and completing the pipelines, Babin said the TMX delay and Line 5 reroute would not have immediate market impacts.

"But rising costs associated with completing pipelines certainly will make anyone thinking of trying to build a pipe think twice," she added.

Pricing mostly unaffected

Earlier this summer, midstream operators were seeing increased demand from Canadian producers to carry crude oil as they came out of maintenances, targeting incremental capacity to move barrels from Alberta to the US Gulf Coast.

The USGC was especially appealing compared with the Alberta oil hubs in Edmonton or Hardisty, as it provided a more cost-effective arbitrage opportunity to Western Canadian heavy and light oil producers.

Western Canadian Select's discount to the NYMEX WTI CMA was assessed by Platts at minus $18.40/b on Sept. 15. Platts is part of S&P Global.

WCS Hardisty has averaged an $18.22/b discount to the WTI CMA during September at a deeper discount compared with previous months. In August WCS Hardisty only averaged WTI CMA minus $16.70/b.

While prices remained mostly unaffected, the potential impact to production could incite movement down the line.

"There might not be an obvious weakening of WCS relative to recent trade, but it may not firm up the way I would expect it to as the pipelines become operative," Evans said.