November 7, 2019

TC Energy Oil Spill Impacts Canada WCS

by Tajinder Dhillon.

On October 30th, TC Energy, owner of the Keystone Pipeline was forced to shut down part of the pipeline system due to a spillage of oil in Edinburg, North Dakota.  Approximately 9,120 barrels of oil spilled across 2,500 square yards according to the company’s website.  As of publication, approximately 6,800 barrels of oil have been recovered.

While the cause for the spill has not been announced, it has had a pronounced impact of oil being able to flow from the Canadian Oil Sands into the Mid-West and Gulf Coast of the United States.  TC Energy stated the pipeline from Hardisty, Alberta to Cushing, Oklahoma and to Wood River/Patoka, Illinois will be shut down.  They also mention that this will not impact the Marketlink pipeline system, which transports oil from Cushing to the Gulf Coast.

Exhibit 1 serves as a reference point to visually observe the structure of the Keystone Pipeline.

Exhibit 1: Keystone Pipeline

Source: Eikon by Refinitiv

While TC Energy has stated this will not impact the lower part of the pipeline, we can see the flow in Keystone Gulf Coast is operating at just over 50% capacity.  TC Energy has not announced when the system will be up and running to full capacity.  Reuters has reported the outage could last 7-10 days.  If the outage is longer than expected, we could see increased pressure on the rail network to help move oil, which is seen as a more expensive and inefficient method of transport.

Impact on Western Canada Select

With the disruption of Keystone, prices for Western Canada Select (WCS) have declined significantly.  WCS is the key oil benchmark in Canada, a heavy oil produced out of the Oil Sands.  WCS generally trades at a discount compared to its lighter companion, West Texas Intermediate (WTI), as it requires upgrading by complex refiners to transform it into more useful refined products including gasoline and diesel.  Another reason for the discount is due to the long distance WCS must travel to reach end consumers in both the Mid-West and Gulf Coast.

Exhibit 2 looks at the WCS-WTI spread, which has declined more than $5/barrel since the spillage to $22.2 a barrel, a level not seen since December 2018.  On a related note, the decline in WCS should have a limited impact to TC Energy’s financials, given that 90% of its long-haul capacity is on a “take-or-pay” basis, eliminating oil price and volume volatility.

Exhibit 2: WCS vs. WTI Spread

Insufficient pipeline infrastructure

This serves as a constant reminder of the bigger problem faced by the Canadian oil industry, which is insufficient pipeline capacity.  99% of Canada crude moves south of the border (long-term average). While new projects including Keystone XL and Tans Mountain pipeline expansion project have been long-debated, the reality today is seen where any outages in pipeline significantly impact WCS.

Canadian Prime Minister Justin Trudeau is under pressure from Alberta and Saskatchewan, who expressed their displeasure during the Canadian election, causing Liberals to lose all their seats in these provinces.  Mr. Trudeau has vowed to make changes, stating, “right now, and for too long, we have been selling our natural resources to the United States at a discount, and that doesn’t serve anyone … getting our resources to markets other than the United States, and getting that done as quickly as possible, remains a priority for us.”  Mr. Trudeau has already promised that the Trans Mountain expansion project will continue ahead, which will increase capacity of oil flowing from Alberta to British Columbia, stating that money received from this project will be spent on the energy transition to cleaner sources.

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