April 20, 2020 / 6:56 PM / 4 months ago

UPDATE 2-Enbridge will not ration Mainline as coronavirus restrictions shred oil demand

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By Jeff Lewis and Rod Nickel

TORONTO/WINNIPEG, Manitoba, April 20 (Reuters) - Pipeline operator Enbridge Inc said on Monday it would not ration capacity for May on North America’s biggest oil pipeline network, as Canada’s oil producers deepen production cuts to cope with low prices and weak demand.

The notice by Enbridge for its Mainline pipeline is the latest sign of dislocation in Canada’s hard-hit energy sector as producers scramble to respond to the COVID-19 pandemic, which has severely cut fuel demand and led refiners to reduce purchases of crude.

Constraints on major export pipelines have plagued the Canadian industry for years, leading to steep price discounts for the country’s heavy crude against U.S. West Texas intermediate oil.

Canada’s oil sands producers have cut an estimated 300,000 barrels per day (bpd) of mostly steam-driven output and more reductions are expected, as travel restrictions and lockdowns in major cities shred North American oil demand.

“Refiners are starting to kick back production. They can’t take any more,” said Grant Fagerheim, CEO of Whitecap Resources Inc.

“There may be (pipeline) capacity but you have no end user to buy your oil.”

Enbridge’s mainline has capacity for 3 million barrels a day, moving Western Canadian oil to U.S. refiners. The pipeline has been regularly oversubscribed in recent years, forcing Enbridge to ration the number of barrels each shipper can move.

Those constraints are easing as producers turn down production. Enbridge said earlier this month it was running the Mainline with unused capacity and that some 20% to 25% of Western Canada’s oil production could be shut in during the second quarter.

Lower than expected Mainline volumes could weigh on near-term share performance for Enbridge, said BMO analyst Ben Pham in a note last week. He expects second-quarter Mainline volumes to drop 450,000 bpd, assuming production shut-ins of 1 million to 1.5 million bpd.

The total impact to Mainline EBITDA could be C$400 million ($283 million) for the first and second quarters, analysts at Tudor, Pickering, Holt & Co said in a Monday note.

Enbridge shares are down about 20% so far this year, while the benchmark Canada share index is down about 16%. ($1 = 1.4134 Canadian dollars) (Reporting by Jeff Lewis in Toronto and Rod Nickel in Winnepeg, Manitoba Editing by Jonathan Oatis and Matthew Lewis)

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