Canada is pursuing projects that will have a major impact not only on national production, but on the North American oil landscape as a whole, as Ashok Dutta explains in New Frontiers, this week’s Oilgram News column.
One of the main lessons from the Keystone XL pipeline saga for Canadian oil producers is that they need to take greater control of their destiny.
The pipeline, which may still get built one day, was supposed to be a conduit for Canada’s growing oil sands production and without it, producers have been forced to use more costly rail and accept lower prices as the crude has faced bottlenecks along the way to the US Gulf.
Instead of taking an ostrich’s approach to the problem, producers and pipeline operators have joined hands to construct new crude and NGL storage and takeaway capacities to allow for greater optionality in getting the crude to the highest priced market.
Since budgets have tightened in the low priced crude environment, producers are tackling the storage issue first as it is a relatively low cost investment, and project capital costs are declining of late.
The cost of constructing a crude oil and NGL storage tank in Alberta is about $85/b and $25/b respectively, said Steven Paget, a vice-president of institutional research with First Energy Capital.
At the end of 2014, total capacity at Hardisty and Edmonton (Alberta’s two main storage hubs) was estimated to be 22 million barrels and 15 million barrels respectively, according to Paget.
As a rule of thumb, total storage space in the hydrocarbons industry should ideally be the equivalent of five to eight days of production, he said.
This means given Alberta’s combined oil sands and light oil output of nearly 2.7 million b/d there should be 13.5 million barrels to 21.6 million barrels of storage—well under the existing 37 million barrels.
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However, with an ambitious long term forecast to double oil sands production to 4.7 million b/d by 2025, companies are tackling the storage issue with vigor, and cash.
Gibsons Energy is due to start up a new 500,000-barrel crude oil storage tank in Hardisty on the back of another 400,000-barrel tank that it completed in February at the same site. And it recently announced it received enough shipper support for another 900,000 b/d storage facility in Hardisty.
And then there’s the Keyera Energy and Kinder Morgan venture unveiled in late March of a 4.8-million barrel facility near Edmonton expected to start in 2017. The mega project is also expandable by another 1.8 million barrels.
More crude oil storage build-up is also in the works, including TransCanada’s 2.6- million barrel Keystone Hardisty Tank Terminal and another 350,000 barrel facility by Enbridge at Athabacsa.
These new project’s come on the back of Kinder Morgan and oil sands producer MEG Energy completing the construction of their 5.2- million barrel and the 900,000-barrel tank in Alberta in the recent past.
Located in the Canadian hinterland that has one of the world’s largest crude oil storage facilities and with nearly 95% of its output being exported south of the border through a largely uninterrupted and well-established network of delivery systems, construction of major crude oil storage facilities in Alberta had not been on the priority list.
However, with commercial crude oil inventories in the US ballooning, the province the has been forced to deal with a reality.
With fears gaining ground of Cushing reaching its maximum capacity this spring and the Energy Information Administration unveiling in late March of US crude stocks topping at 466 million barrels, an increase of some 84 million barrels since the beginning of the year, the situation for Alberta’s producers is becoming more critical.
Alberta’s oil sands output is still on track to grow by another 1.3 million b/d by 2017/18 despite the current market conditions. The province’s producers are well aware of the main issue in hand: high crude oil inventories will likely result in a further drop in prices, unless they can keep the crude locally.
Canadian producers got some relief in in January with the start of the 850,000 b/d Seaway pipeline in December that runs from Cushing to Texas.
Filling of crude has also just started on the 570,000 b/d E2H (Edmonton to Hardisty) line that will ease takeaway constraints from Edmonton, a key pricing point for Canadian crude.
Also, early this summer Enbridge will start up the long-awaited Line 9 pipeline reversal delivering another 300,000 b/d of light and heavy barrels of Western Canadian crude to refineries in Eastern Canada.
Showing the benefits better logistics can provide, Canadian crude differentials increased after Seaway started and in anticipation of the Line 9 reversal.
Companies are also getting set to export gas-rich molecules from shale plays in the Western Canadian Sedimentary Basin, with Fort Saskatchewan currently emerging as the front-runner to build the storage tanks for propane, butane and downstream ethylene.
— Ashok Dutta in Calgary