Canadian crude producers are facing a prolonged period of discounted pricing, despite recent moves to open new pipeline capacity to the U.S. Gulf Coast.
Enbridge Inc. and its partner, Enterprise Products Partners , began operations on the weekend at the revamped Seaway pipeline, which reversed the original flow and can now deliver 150,000 barrels of crude per day to Houston refineries from the oversupplied Cushing, Okla., hub. The partners plan to expand that capacity to 400,000 barrels per day by early 2013.
But analysts at Morgan Stanley say even that expansion will not eliminate bottlenecks in the pipeline system that will continue to depress the price of crude supplies from Canada and the northern U.S., relative to international prices.
"We don't think the Seaway reversal and expansion will be sufficient" to eliminate the glut at Cushing, Hussein Allidina, chief commodity economist at the New York-based investment bank, said in a conference call Tuesday. That glut in turn has put pressure on the price of West Texas Intermediate, the benchmark for North American crude, Mr. Allidina said.
As a result, Canadian producers will continue to face steep discounts on their crude compared to internationally traded oil, a trend that has weighed on results of Canadian energy companies. And backed by the Alberta and federal governments, the industry will maintain the effort to diversify its markets to the Pacific Rim and eastern Canada through projects like the Northern Gateway pipeline and Enbridge's reversal of a pipeline that carries crude to southwestern Ontario from Montreal.
U.S. oil production is expected to grow by 2 million barrels a day between 2010 and 2015, and the pipeline system will have difficulty keeping pace, creating bottlenecks that will distort markets and affect prices.
Morgan Stanley analysts expect the differential between the internationally traded Brent crude and WTI to shrink this summer, but then widen again this fall as production increases and several major refineries in the Midwest are scheduled to shut down for maintenance.
Even as pipeline companies add capacity from Cushing to the Gulf Coast, new bottlenecks will develop further north, widening the spread between WTI and Canadian crudes, the analysts said.
"Canadian and Midwest bottlenecks are unlikely to see any material relief before mid-2014 at the earliest," they said in a report. "Beyond 2015, new and growing sources of production are likely to bring additional infrastructure challenges, even after many of these projects come online."
Producers in Alberta face a double discount: WTI was trading $17 (U.S.) below Brent on Tuesday, while the leading Alberta crude, Western Canadian Select, sold for $16.25 below WTI as tracked by Net Energy Inc.
Increasingly, producers in western Canada and North Dakota's Bakken region are using rail cars to get their product to markets, even as far away as Philadelphia. Morgan Stanley analysts estimated rail shipment from Edmonton to a refinery in Paulsboro, N.J., costs $20 a barrel, while shipment to Vancouver by rail would add $10 a barrel.
TransCanada Corp. 's Keystone XL project should alleviate much of the bottleneck at Cushing, but that's not expected to begin operation until 2015 at the earliest.
Critics of the Keystone XL project argue the pipeline will drive up gasoline prices for U.S. consumers by shrinking the discount applied to WTI. In a report Tuesday, Natural Resources Defense Council and ForestEthics Advocacy said the pipeline will divert supplies from the Midwest to the Gulf Coast, where refiners produce more diesel for export.
TransCanada has long denied the XL pipeline would drive up American pump prices, saying it will not divert crude from other markets, but will increase supplies in the Gulf Coast, helping reduce prices overall.