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Oil-sands glut jams pipes to U.S., rail next option

Sheela Tobben and Robert Tuttle

Canada is sending a record amount of oil to the U.S., filling pipelines to capacity and threatening to push more crude into rail cars.

U.S. imports from its northern neighbor jumped 17 percent to 3.46 million barrels a day last week, the U.S. Energy Information Administration said Wednesday in a preliminary report. That’s the most since the agency began collecting such data in 2010. Exports have surged as Alberta recovers from wildfires that disrupted supplies earlier this year.

Supplies from the oil sands are piling up as producers bring back output and projects that had been delayed by the fires come online. The glut highlights Canada’s dependence on the U.S. market after TransCanada Corp.’s seven-year struggle to get approval for the Keystone XL link to the Gulf of Mexico failed while its proposed Energy East line to the Atlantic Coast faces mounting opposition in Canada. The stress on existing lines means more crude will be hauled by rail at higher costs and the discount on Canadian crude will likely widen.

“As volumes continue to build, so will the pressure on the constrained pipelines system,”Kevin Birn, a director at IHS Energy in Calgary, said by e-mail Wednesday. “At some point in the coming months those volumes could very well overtake available capacity and increased movements of rail should be expected.”

Pipeline Capacity

Enbridge Inc.’s mainline system, the most important conduit for shipping Canadian crude into the U.S., has been running above its 2.4 million-barrel-a-daycapacity and was full in August, according to Genscape Inc. analyst Ryan Saxton. Other lines including Spectra Energy’s Express and TransCanada’s Keystone were about 89 percent full last month.

Western Canadian Select heavy crude is trading at a discount of $14.30 a barrel to West Texas Intermediate, according to data compiled by Bloomberg. WTI for November delivery advanced 98 cents to settle at $46.32 a barrel on the New York Mercantile Exchange on Thursday. The U.S. benchmark is down almost 60 percent from its 2014 peak.

The discount on Canadian crude could expand to a one-year high of $16 a barrel by year end as a bigger price spread will be needed to encourage the use of rail, a more expensive method of shipment, said Eric Peterson, research chief at Denver-based ARB Midstream LLC, an oil transport investor.

Crude by Rail

Canadian crude-by-rail exports rose to a six-month high of 109,000 barrels a day in April before declining after wildfires took about 1 million barrels a day of production off the market, National Energy Board data show.

While Canada’s conventional oil production is declining, oil-sands output continues to grow as projects initiated before the 2014 oil rout are completed. Companies including Cenovus Energy Inc. and Canadian Natural Resources Ltd. are set to add about 390,000 barrels a day of capacity by the end of next year, according to company statements and JuneWarren-Nickle’s Energy Group’s Summer 2016 Oil Sands Quarterly.

Crude output is expected to rise about 5 percent to more than 4 million barrels a day in 2017, above the country’s pipeline export capacity, according to the Canadian Association of Petroleum Producers.

As getting approval for pipelines at home has become increasingly difficult, Enbridge and TransCanada have sought deals south of the border to expand. Enbridge agreed to pay$28 billion forHouston-based Spectra Energy Corp. and TransCanada is buying Columbia Pipeline Group Inc., also based in Houston, for $10.2 billion.

“Canada is stuck with its main outlet being the U.S.,”Bloomberg Intelligence Analyst Gurpal Dosanjh said in a phone interview in New York. “This will stay in the considerable future while Canadian production grows.”