Canada Could Boost Oil Pipeline Capacity As Soon As September

Canada’s oil sands producers may find welcome relief to years of pipeline capacity constraints when the first new pipeline in years could enter into service as early as next month. 

Enbridge said in a filing with the Canada Energy Regulator last week that its Line 3 replacement program in the United States “could be completed within the next 30 to 60 days which will allow the Line 3 replacement pipeline to commence service as early as September 15, 2021.”  

Enbridge’s Line 3 Replacement project will replace the existing 34-inch pipe with new 36-inch pipe for 13 miles in North Dakota, 337 miles in Minnesota, and 14 miles in Wisconsin. The average annual capacity of Line 3 after replacement is planned to be 760,000 barrels per day (bpd), which would be a capacity increase of 370,000 bpd compared to the capacity of the original Line 3.  

The Line 3 replacement is already in service in Canada, but it is not yet operational in the United States. Construction of the new Line 3 in Minnesota started in December 2020. The project is already 80 percent completed in Minnesota, Enbridge says. 

But the completion of the pipeline still faces opposition from environmentalists and first nation groups, which continue to sue Enbridge and the state of Minnesota, asking for injunctions to protect lands, water, and crops along the pipeline route.

The Line 3 replacement is already three years late compared to its original proposed in-service date, 2018, and it is expected to begin operations at full capacity in the fourth quarter of this year, according to the CER’s latest report Canada’s Pipeline System 2021. 

The delays in the proposed pipelines’ in-service dates, including Line 3 replacement and the Trans Mountain Expansion project now that Keystone XL is dead and buried, have weighed on Canadian benchmark oil prices. For years, operators have had the same capacity to transport their crude out of Alberta while production has been rising.   

In 2019, Canada’s crude oil production averaged 4.9 million bpd, with oil sands output jumping by 25 percent between 2015 and 2019, the CER said in its report. 

The discount of Western Canadian Select (WCS) – the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta – relative to the U.S. benchmark WTI Crude averaged US$15.27 per barrel between 2015 and 2020, the regulator noted. This differential soared to as much as US$50 a barrel on some days in October 2018 as production in Canada exceeded capacity for pipeline and crude-by-rail shipment. Alberta mandated region-wide production cuts, and existing pipelines optimized flows to cope with the insufficient capacity. 

Lowered production in 2020 with the pandemic eased some of the pressure, but Canada’s crude oil production is set to grow. So, at least one new pipeline is crucial for Canadian operators to get their product to refining markets.  

The Line 3 replacement, if it becomes operational in a month, would be the best immediate chance for Canada’s oil industry to boost its takeaway capacity. Yet, the project continues to face challenges. 

Earlier this month, the White Earth Band of Ojibwe tribe sued Minnesota, claiming that the state is violating the rights of wild rice, which “possesses inherent rights to exist, flourish, regenerate, and evolve, as well as inherent rights to restoration, recovery, and preservation.” 

Enbridge says that “Line 3 construction permits include conditions that specifically protect wild rice waters. As a matter of fact Enbridge pipelines have coexisted with Minnesota’s most sacred and productive wild rice stands for over seven decades.”

Line 3 may be very close to the final hurdle, but it hasn’t passed it yet. 

The threat to Enbridge’s operational Line 5 pipeline through the Great Lakes is another potential major capacity issue to Canadian oil exports. Enbridge is engaged in a mediation with the state of Michigan, which wants the pipeline shut down, and the mediation is expected to be completed by the end of August.

New pipeline capacity is crucial to Canada’s oil industry as crude supply is expected to increase by almost 900,000 bpd between 2020 and 2030, IHS Markit has estimated.

“That growth is coming, and transportation capacity is needed to keep pace. IHS Markit estimates that, by just 2025, total crude movements could increase by more than 650,000 barrels per day from pre-pandemic levels,” said Kevin Birn, vice president and chief Canadian oil market analyst, IHS Markit.

“Any disruption of existing infrastructure could have significant implications for Canada, the broader North American system and energy security,” Birn said.