Canada’s oil industry is on the brink of a significant expansion, with plans to introduce approximately half a million barrels of additional daily output into global markets within the next year. This surge in production, equivalent to the total output of some OPEC nations, presents both opportunities and challenges for the industry.
While the influx of new crude promises growth for an industry that has faced stagnation, it also poses the risk of exacerbating global supply surpluses and reigniting pipeline shortages that have plagued Canadian producers for years. Such shortages have historically led to downward pressure on the prices of the country’s oil exports.
The impending expansion of the Trans Mountain crude pipeline, scheduled to commence operations in the near future, is expected to contribute significantly to the increase in available western Canadian oil for export. S&P Global estimates that the expansion will add approximately 500,000 barrels per day to the export capacity by the end of next year, nearly exhausting the new capacity of 590,000 barrels per day on Trans Mountain.
However, delays in the pipeline’s expansion due to drilling challenges along its route have created a mismatch in timing. While much of the new output from Alberta’s oil sands mines and wells is already flowing, the delayed expansion of Trans Mountain has strained existing pipeline systems, leading to bottlenecks and impacting heavy Canadian crude prices.
The Trans Mountain expansion, a project years in the making, faced significant opposition from Indigenous groups and environmentalists in British Columbia. Despite these challenges, the Canadian government intervened by purchasing the pipeline to ensure its completion, aiming to provide producers with access to Asian markets. Nevertheless, construction delays and cost overruns have persisted.
The anticipation of Trans Mountain’s operations has prompted drillers to ramp up output, setting record levels of oil production in Alberta in recent months. This surge in production has put pressure on existing infrastructure, leading to Enbridge Inc. rationing heavy-oil line space on its Mainline system.
Despite expectations that Trans Mountain would alleviate pressure on the Mainline, Enbridge anticipates the need to continue rationing pipeline space even after its completion. The lack of adequate pipeline capacity has resulted in heavy Canadian crude selling at a discount to the US benchmark, widening the gap to levels not seen in years.
The surplus of Canadian oil adds to the challenges facing global markets, complicating efforts by OPEC to balance supply and demand. Additionally, the risk of pipeline disruptions poses a threat to Canadian producers, who may be forced to curtail output or resort to more costly rail transportation in the event of a shutdown.
Looking ahead, Alberta drillers plan to further increase output in the coming years, potentially exacerbating pipeline constraints. However, projections suggest that if production growth slows down as anticipated, the industry may avoid a return to major pipeline shortages. Nonetheless, the risk of insufficient pipeline capacity remains a concern for Western Canada’s oil sector.
