New pipelines no silver bullet for battered Canada oil industry

Wed Nov 30, 2016 4:44pm EST
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By Nia Williams

CALGARY, Alberta (Reuters) - Canada's oil sands producers are getting a long-awaited boost in export capacity, but the two pipeline projects approved this week will not be a silver bullet for the industry's woes unless crude prices pick up or companies improve their operating efficiency.

The Canadian government approved Kinder Morgan's (KMI.N: Quote) plan to triple volumes on its Trans Mountain pipeline to 890,000 barrels per day, and cleared Enbridge Inc's (ENB.TO: Quote) Line 3 replacement project, which will roughly double capacity to 760,000 bpd. Enbridge's Northern Gateway pipeline was rejected.

The two approvals were welcomed by the oil industry, which has pushed for years for new capacity to solve congestion on export pipelines that in the past has sent the discount on Canadian heavy crude to more than $40 a barrel.

Producers said delays in new pipeline construction cost them millions in revenue, hurt Canada's economy and meant the industry was too reliant on one customer - the United States - when it should be trying to diversify into Asian markets.

But without a sustained improvement in the crude price, Canada's oil sands, which hold the world's third-largest crude reserves and produce about 2.4 million bpd, will struggle to expand significantly beyond the new projects already under construction.

Oil sands production is expected to grow on average by 128,000 bpd annually until 2021, after which growth will more than halve to just 59,000 bpd, according to forecasts from the Canadian Association of Petroleum Producers.

U.S. crude prices CLc1 surged above $49 a barrel on Wednesday on a deal by international producer group OPEC to tackle global oversupply, but that is still below the $55-$60-a- barrel range analysts estimate new oil sands thermal projects require to break even.

"Let's say the price of crude never corrects itself, then pipelines would be a moot point," said Dirk Lever, an energy infrastructure analyst at AltaCorp Capital in Calgary. "The (Canadian) energy industry had two huge issues to face - egress and price. Price is still in front of us."   Continued...

Crude oil tanks at Kinder Morgan's terminal are seen in Sherwood Park, near Edmonton, Alberta, Canada November 13, 2016.  REUTERS/Chris Helgren