November 3, 2015 / 11:10 PM / 2 years ago

Keystone delay heralds long-term pain for Canadian oil producers

CALGARY, Alberta, Nov 3 (Reuters) - A further delay or outright rejection of the TransCanada Corp Keystone XL project risks a looming capacity crunch on Western Canada’s pipeline network, causing more pain for producers already struggling with weak global crude prices.

In the latest twist in the seven-year Keystone XL saga, TransCanada on Monday asked the U.S. State Department to pause its review of the permit, a move seen pre-empting a possible rejection by U.S. President Barack Obama.

On Tuesday the White House said Obama wants to make a call on the project by the end of his presidency.

An outright rejection would be a death knell for the pipeline intended to ship 830,000 barrels per day of oil sands crude to Nebraska and the U.S. Gulf Coast. Even if the requested seven- to 12-month pause is granted, and permits are received, the pipeline looks unlikely to start before 2019 at the earliest.

By then Western Canadian supply, including the portion of U.S. Bakken crude transported on Canada’s pipeline network, will likely have risen to 4.5 million to 5 million barrels per day, according to the Canadian Association of Petroleum Producers.

Current takeaway capacity on the system is just over 4 million bpd and planned expansions by Enbridge Inc to its Mainline system will bump that up to around 4.4 million bpd, leaving rail to fill the gap.

Meanwhile, other export pipeline proposals including TransCanada’s Energy East and Enbridge’s Northern Gateway look no closer to getting approved.

The looming crunch would look a lot worse if not for the global crude price collapse, which has slowed oil sands and Bakken crude growth. Even so, it clouds the outlook for oil sands producers, which have some of the highest production costs globally as well as land-locked crude.

“There’s less of a pinch point because of the reduced production growth but there’s still the need for additional pipeline,” said Judith Dwarkin, chief energy economist at ITG Investment Research.

As well as market access issues, investors face weak oil prices, high project breakeven costs, and royalty rate and climate change policy reviews from the Alberta government.

Last week Royal Dutch Shell Plc cancelled its 80,000-bpd Carmon Creek oil sands project, citing lack of infrastructure to move Canadian crude to market, as did Statoil in 2014 when postponing its 40,000-bpd Corner project.

“Market access is a serious concern. It’s absolutely front and centre of any producer’s mind when they commit to a multi-billion dollar project,” said Sonny Mottahed, chief executive officer of boutique investment bank Black Spruce Merchant Capital, adding more projects could scrapped because of the Keystone XL delay.

In recent years pipeline bottlenecks in Alberta, the largest source of U.S. crude imports, have at times blown the discount on Canadian heavy crude out to more than $40 a barrel. With U.S. crude languishing around $45 a barrel, many producers cannot afford another capacity crunch.

“We would certainly like to see better market access because there are pricing impacts on constraints to reaching markets,” said Brad Bellows, a spokesman with oil sands producer MEG Energy.

The delay validates moves by producers like Imperial Oil Ltd and Cenovus Energy, who invested in their own crude-by-rail terminals.

However rail is roughly $5 per barrel more costly than pipeline and takes a larger chunk out of producer profits.

“As you can see from third-quarter earnings many companies are losing money on production so that $5 becomes crucial,” said ARC Financial analyst Jackie Forrest.

Editing by Lisa Shumaker

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