The Daley Note: March 23, 2023
Oil producers in Western Canada must continue waiting before a pipeline expansion to the Pacific Coast opens access to international markets. The delay should keep Canadian crude oil prices under pressure, according to East Daley Analytics’ Crude Hub Model.
Trans Mountain Corp. issued a project update on March 10 for its 590 Mb/d pipeline expansion. The total cost for the Trans Mountain expansion ratcheted higher once again. The latest estimate came in at C$30.9 billion, a staggering C$23.5 billion higher than initial project estimates.
The project will twin the existing Trans Mountain Pipeline running from Edmonton, AB to Burnaby, BC, providing much-needed crude oil egress capacity for producers in Canada. The Trans Mountain expansion includes 12 new pump stations, 19 new storage tanks, and three new shipping berths at a marine terminal in Burnaby.
The government of Canada bought the Trans Mountain Pipeline from Kinder Morgan (KMI) in 2018, and construction on the pipe expansion began in 2019. The project has been plagued by numerous cost overruns due to challenges from the pandemic, inflationary pressures, difficult mountain terrain, archeological discoveries and lower labor productivity.
As a result, the estimated in-service date for the expansion has been pushed back several times, with the latest update calling for crude oil volumes to begin flowing in 1Q24. The company’s previous estimate called for a 2H23 start-up.
Data from East Daley’s Crude Hub Model indicates the delay is likely to keep downward pressure on Western Canadian Select (WSC) crude oil prices, as the basin will max out on total pipeline egress capacity through year-end 2023 (see figure). Incremental volumes above the total egress capacity will have to be moved out of the basin by rail, which comes at a much higher cost than pipeline transportation rates.
Although the Trans Mountain delay deals another blow to constrained Canadian producers, companies like Enbridge (ENB) and TC Energy (TRP) should benefit, as their respective pipelines out of Western Canada will continue to run full until the expansion begins service. – AJ O’Donnell Tickers: ENB, KMI, TRP.
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