Canadian Oil Producers Consider New Pipeline Route To Gulf Coast As Marathon Flips Capline Pipe

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Canadian producers don’t need to physically ship on the Capline to take advantage of the reversal

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CALGARY – Canadian oil producers could soon take advantage of higher prices for the crude they sell to the United States, as a major south-northeast pipeline is in the final stages of a reversal – an underestimated event that could enhance the prospects of the domestic oil industry.

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Ohio-based Marathon Pipelines LLC has filed tariffs for transporting crude oil on its Capline pipeline from Patoka, Ill. To St. James, Louisiana for rates effective Oct. 25, according to RBN Energy. , an energy market consulting firm.

Capline was the largest south-north-flowing pipeline in the United States with a capacity of 1.2 million barrels of oil per day, but owner Marathon Petroleum has been working to reverse the flow since 2017, this that would allow heavy and light oil to flow from a storage center in the US Midwest to a large refining center on the Gulf Coast. The company’s website notes that the reversal will be completed this year.

“They’re filling the pipes right now,” BMO Capital Markets analyst Randy Ollenberger said of Capline, adding that he expected the pipeline to reduce Western Canada Select’s discounts relative to price. West Texas Intermediate oil at US $ 10 a barrel. A barrel of WCS traded up 1.67 percent to US $ 67.08 on Thursday, implying a discount of US $ 15.50 per barrel from the WTI price of US $ 82.58 on barrel.

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“We don’t know who has contracts on the Capline, but we think everyone benefits in the sense that the spread comes into play. You don’t have to physically ship to the Capline to benefit from it,” Ollenberger said, adding that he expects to see the line’s impact on the results of Canadian producers in the second quarter of 2022.

Oil producers contacted by the Financial Post said they expected the project to improve their barrel yields.

“I’m excited about this. I think the Capline reversal would certainly be positive for Canadian producers and improve the optionality of pipelines, especially for the heaviest producers, but it would lighten the entire pipeline network in Canada ”, Grant Fagerheim, President and CEO of Whitecap Resources Inc., told the Financial Post, referring to issues where Canadian oil exports have exceeded pipeline capacity in the past.

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Fagerheim said he would consider using the Capline to move more of his company’s oil to the U.S. Gulf Coast, adding that the possibility of delivering oil to the U.S. Midwest or the Gulf Coast of the United States provides “insurance” for the oil field by offering a variety of markets.

The rating agency Fitch also expects the Capline reversal to attract crude oil from Canada, North Dakota and “mid-continent” to the US Gulf Coast.

To use Capline, Canadian oil producers will need to ship their crude through Enbridge Inc.’s main pipeline system to the US Midwest, then switch to Enbridge’s Southern Access pipeline connected to the Patoka oil storage facility, which offers direct access to the Capline and a forehand to US Gulf Coast refineries.

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The Capline reversal comes on stream alongside Enbridge’s 760,000 b / d Line 3 replacement project, which the Calgary-based pipeline giant completed in September and is now fully operational. Capline’s rates range from $ 1.75 per barrel for shippers pledging to move more than 100,000 barrels per day on the spot line to $ 3.75 per barrel.

For years, Canadian oil producers sold the majority of their barrels to refiners in the American Midwest. TC Energy Corp.’s Keystone XL pipeline. was proposed as a way to reduce reliance on this market by shipping 830,000 bpd directly to the US Gulf of Mexico coast, which is home to the largest concentration of heavy oil refineries in the world.

At times when demand for gasoline in the Midwest was declining or refineries in the region were out of service for maintenance, Canadian heavy oil barrels, known as Western Canada Select, suffered significant discounts – sometimes up to at US $ 40 per barrel – relative to the West Texas Intermediate benchmark.

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The same thing happened when Canadian oil production exceeded pipeline capacity at the end of 2018.

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The Capline reversal works like a “mini Keystone XL,” said Rory Johnston, managing director and market economist at Price Street in Toronto, adding that it would offer oil producers the option of shipping to the Midwest or the coast. of the Gulf.

“At first glance, I don’t think it should have a direct impact on the shrinkage (on WCS / WTI differentials) as it doesn’t really increase the output of (Alberta) proper, but there is quite a monopsony. robust and a concentration of buyers for Canadian players in the US Midwest, ”said Johnston.

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“It reduces the likelihood of big, big blowouts if you have issues like heavier maintenance (in the Midwest region) , for example, ”he said.

“This will definitely help keep differentials tighter than what we’ve seen in the past, as you’ll have more exit options out of Western Canada,” said Martin King, senior analyst at RBN Energy, adding that ‘he expected the reversal to help. differentials are trading in the range of US $ 12 per barrel to US $ 14 per barrel.

Marathon did not respond to a request for comment on when the Reverse Capline would begin shipping large volumes of heavy crude oil. The project is expected to begin shipping small volumes of light oil this year, followed by heavier blends in 2022.

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