WCS discount tightens to roughly $14/b
Debottlenecking, reducing agents can expand capacity up to 500,000 b/d
Canadian growth depends on demand, carbon capture success
Canadian crude price discounts have narrowed since November, in part because the long-awaited Trans Mountain crude pipeline expansion is due to come on stream in the second quarter of 2024.
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Producers may celebrate the extra pipeline capacity as a cure for deep price discounts, but for how long? Considering Western Canada’s production plans, aided, producers hope, by a large-scale carbon capture project, price discounts could easily widen as soon as the marginal barrel has difficult time finding an outlet.
Spot Western Canadian Select crude has averaged at a $13.92/b discount to WTI so far in March, according to Platts assessments. That discount has narrowed from an average $25.44/b in November, when Canadian export supply of roughly 4.8 million b/d exceeded pipeline capacity by 180,000 b/d, S&P Global Commodity Insights data shows.
In the short term, discounts will likely remain stable as S&P Global expects Canadian export supply to rise to 5 million b/d by the end of 2025, remaining below pipeline capacity of 5.2 million b/d, as Trans Mountain will add roughly 500,000 b/d of export capacity.
WCS discounts at around $12-$14/b to WTI reflect a “‘normal’ baseline, devoid of aberrations caused by the lack of egress capacity,” S&P Global analysts said in a report.
Deep price discounts are nothing new for Canadian producers. In late 2021, for instance, WCS discounts widened prior to the ramp-up of Enbridge’s Line 3 crude pipeline replacement. And in late 2022, WCS discounts widened because of a temporary outage on TC Energy’s Keystone Pipeline System.
Apart from any unplanned outages, analysts say discounts could widen as soon as 2028.
With debottlenecking and using drag reducing agents, another 350,000 b/d to 500,000 b/d of new pipeline capacity can be added to the major crude pipelines.
“Everybody should be looking at that. Because its relatively easy,” said Mark Maki, Trans Mountain’s chief financial and strategy officer, on the sidelines of the CERAWeek by S&P Global conference on March 20. “There may well be some staged expansion of the systems that’s going to be required to make sure that we keep the differential in. How fast that happens? Well, it depends on production growth,” he said.
An additional 800,000 b/d of production could be added by 2028, exceeding takeaway capacity, according to analysts. S&P Global analysts do not expect a bottleneck until 2030, when Canadian crude supply reaches 5.8 million b/d.
Alberta Energy Minister Brian Jean, speaking on a panel at CERAWeek, was bullish on Canada’s crude production prospects. “My boss is pretty ambitious and so wants to double production of oil and I’m there with her,” Jean said. “We can get halfway there right now with what we have.”
New pipelines take time
But adding new pipelines will likely take time, unless the permitting process is streamlined. The Trans Mountain expansion took 12 years to complete, and required the government to take over the project from Kinder Morgan.
The government “was the only party that could have gotten it done,” Maki said.
Production growth will depend on continued demand from refiners, notably in Asia, which might be limited by Chinese growth and by the high TAN rating of Canadian oil sands.
Growth will also depend on the success of the Pathways Alliance carbon capture storage project, considering the high carbon rating of Canadian crude.
“We’re filing for approval of phase one of the project by the end of this week,” Pathways Alliance President Kendall Dilling said March 20 on the sidelines at CERAWeek. “We expect around a one-year approval process, and then the final investment decision will follow.”
Still, the path to construction remains unpredictable in terms of permitting and funding CCS, with the primary concern being operating costs, Dilling said.
And the six Canadian producers making up Pathways Alliance are looking for some longer-term security in carbon pricing. Unless the federal government can assure long-term carbon prices in the form of “contracts for difference,” it is difficult to see the project taking off.
