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Pipeline shortage could choke North America’s oil supply with ‘serious implications for global markets’, IEA warns

Each year the world needs to replace 3 million bpd of supply lost from mature fields — that's the equivalent of replacing one North Sea each year

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Canada will continue to pump out more barrels from the oilsands over the next few years, but delays to pipeline approvals and uncertainty over the provision of more export capacity is undermining the next wave of development, according to the International Energy Agency.

In its annual five-year oil forecast published Monday, the IEA warned that Canadian oil pipeline constraints are part of a wider capacity crisis brewing across North America.

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“Colossal growth in North American supply from 2018 to 2023 raises the crucial question of whether there is enough pipeline capacity to transport and sell all of that oil,” the Paris-based agency said in a report. “If sufficient capacity is not built, the increase in production we foresee could be at risk, with serious implications for global markets.”

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Despite the pipeline shortages, Canada will be among the countries leading growth in oil output over the next few years, taking its overall production to 5.6 million barrels per day by 2023, compared to 4.8 million bpd this year.

But the surge would come at a time of limited export options.

“During 2018-19, West Texas and West Canada are likely to face shortages in midstream capacity brought about by a rapid production increase,” the IEA said. “The situation will be much more severe in Canada than West Texas as legal delays mean capacity is unlikely to increase before the end of 2019.”

Choked pipelines means Canadian heavy oil benchmark Western Canada Select is currently trading at a $31 per barrel discount against the West Texas Intermediate U.S. crude oil benchmark, compared to $12 at the same time last year, according to Petroleum Services Association of Canada data.

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Over the next few years, Canadian takeaway capacity will likely come from Enbridge Inc.’s Line 3 replacement between Hardisty, Alberta, and Superior, Wisconsin. The project is still awaiting approval from Minnesota. Another 125,000-bpd of takeaway capacity may come from Enbridge optimising its Mainline conduit.

Kinder Morgan Canada Inc.’s Trans Mountain pipeline also faces significant opposition, as does TransCanada Corp.’s Alberta-to-Nebraska Keystone XL pipeline. The IEA does not expect either of the pipelines to be ready before 2021.

Instead, rail capacity, which could offer as much as 900,000-bpd spare export capacity, will become an integral part of the supply chain.

“Crude by rail exports are likely to enjoy a renaissance, growing from their current 150,000 bpd to an implied 250,000 bpd on average in 2018 and to 390,000 bpd in 2019. At their peak in 2019, rail exports of crude oil could be as high as 590,000 bpd – though this calculation assumes producers do not resort to crude storage in peak months,” the IEA said.

In addition, another 400,000 bpd rail capacity can be quickly commissioned by companies to pick up the slack.

The Canadian oil constraints come as global demand for oil remains strong.

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“Oil demand growth in the next five years rests on solid outlook for the global economy,” said the IEA. “While there is no peak oil demand in sight, the pace of growth will slow down to 1 million bpd by 2023 after expanding by 1.4 million bpd in 2018.”

While more stringent emissions regulations and rise of electric vehicles and switch to natural gas vehicles will slow demand for oil, the fastest-growing source of global oil demand growth will be petrochemicals, particularly in the United States and China.

SUPPLY RISKS
The IEA expects the supply agreements orchestrated by the Organization of the Petroleum Exporting Countries and its allies such as Russia and Oman back in 2017 will continue to remain a feature of oil markets.

“We assume OPEC/non-OPEC market management remains in place, at least in the early part of the forecast (2018-2023), with officials signalling a willingness to institutionalise their partnership.”

Indeed, OPEC will remain under pressure from production growth in the United States, Brazil and Canada over the next few years. The United States will lead the way with production growth of 3.7 million – nearly as much as the entire production of Iran – OPEC’s second largest oil producer. In 2018 alone, U.S.’s crude oil output is set to expand by 1.3 million bpd in 2018, allowing it to overtake Saudi Arabia and rival Russia as the world’s largest crude producer, the energy watchdog said.

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“Total non-OPEC oil supply rises by 5.2 million bpd to reach 63.3 million bpd by 2023. Conventional crude production actually falls slightly over the period, with tight oil, oil sands, natural gas liquids (NGLs) and other non-conventional supply providing all the net non-OPEC growth,” the IEA said.

The producers’ decision to curb investments in the short-term amid uncertain oil price environment could lead to a supply risk into the future, warned the IEA.

Last year, total upstream oil investment stood at US$41.7 billion, its lowest level since 2005. The investment yielded four billion barrels of crude, condensate and NGLs globally — not since the 1930s was so little oil found.

“Natural production declines are slowing, but more investment will be needed. Each year the world needs to replace 3 million bpd of supply lost from mature fields while also meeting robust demand growth. That is the equivalent of replacing one North Sea each year,” according to the IEA.

While supply from non-OPEC countries will more than cover expected demand growth till 2020, the situation could become more acute by 2023, if investments remain insufficient and effective global spare capacity cushion falls to only 2.2% of demand, the lowest number since 2007.

“This raises the possibility of oil prices becoming more volatile until new supplies come on line,” the IEA said.

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