It sounds like many were surprised by our positive view on Cdn oil outlook that we outlined in our SAF 2019 Energy Market Outlook webcast today. [The webcast is found at:[LINK]] Our outlook was titled “Near Term Canadian Oil Outlook Looks Significantly Better Than Expected”. We recognize the tone to Cdn oil has been negative post the recent Trans Mountain expansion court ruling and the big hit to Cdn light and heavy oil differentials in Sept. The market expects Enbridge’s Line 3 to add 375,000 b/d in late 2019, but then nothing until Keystone XL around 2022/2023 and hopefully Trans Mountain expansion at 2023 or later. And Line 3, by itself, is only expected to provide temporary pipeline relief for projected western Canada oil growth However with the delays in Keystone XL and Trans Mountain expansion, we believe there is an excellent opportunity for action on Enbridge’s suite of “low cost” “highly executable” projects that could add 450,000 b/d capacity to its mainline to PADD II (Midwest). We call these Enbridge’s “Other” projects, which for some reason have been ignored despite being highlighted going back to the Enbridge Dec 2017 investor day. We believe that there is at least 325,000 b/d of likely capacity additions around 2020 – drag reducing agents, unutilized Bakken Expansion Program capacity and Line 13 reversal. It is important to remember that Enbridge sees each of these projects as adding effective capacity on its mainline. These Enbridge”Other” projects are why we believe Canada’s added oil egress could be 700,000 b/d around 2020, and almost double the current market view of only 375,000 b/d. And by adding these “Other” projects, there should be enough pipeline capacity to support western Canada oil growth to 2025. This is why we see these as a potential game changer and why we had such a positive Cdn oil outlook in our webcast today.
Enbridge’s Line 3 Only Provides Temporary Relief To The Cdn Oil Egress Shortfall. Post the recent Federal Court of Appeal ruling against Trans Mountain, the overwhelming view has been that the only significant additional oil egress before 2022/2023 is Enbridge Line 3 Replacement project to add 375,000 b/d in late 2019. Most seem to believe TransCanada will be able get its Keystone XL 830,000 b/d pipeline over the goal line, but with views generally in 2022 or 2023. There are mixed views on the 590,000 b/d Trans Mountain expansion post the recent court ruling. Some believe it will never get done, but, those that do, seem to be looking at first timing sometime after 2023. The reason why markets have been cool at best for the Cdn oil egress picture is that Enbridge Line 3 is viewed to only provide temporary relief. We created the below graph using CAPP’s June 2018 long term oil production estimate and layering in Enbridge Line 3, TransCanada Keystone XL and Trans Mountain expansion. It shows that, compared to CAPP’s long term oil production forecast, the relief from Enbridge Line 3 will be quickly used up and the sector will be back to pipeline egress short by 2022.
Enbridge Line 3, Keystone XL and Trans Mountain Expansion
Source: CAPP, SAF
Enbridge has “highly executable solutions” to increase mainline effective capacity by 450,000 b/d. We suspect Enbridge’s “Other” mainline capacity addition projects have been forgotten for a long time because these are long identified projects that were originally sitting behind Enbridge Line 3, Keystone XL and Trans Mountain expansion. They have been there for a year, but perhaps with the delays in Trans Mountain and Keystone XL in 2018, we wonder if these delays provide an opportunity for Enbridge to move on these “highly executable” “low cost stage options” to provide additional egress to the Cdn oil sector in and around 2020 ie. the next egress after its Line 3. We were surprised to see Enbridge has this much additional expansion potential on its mainline to PADD II (Midwest) and it is even earlier than expected. The information we are basing this on is not new, rather its almost a year old. In its Dec 2017 Investor Day, Enbridge noted its mainline expansion projects that could add 450,000 b/d capacity on the mainline. At the investor day, mgmt. said “want to shift gears a bit now and talk about the future of the business and the opportunities that we have on our plate to extend growth beyond this three-year period. We continue to believe that the low cost stage options to expand our mainline capacity through highly executable solutions with reduced regulatory requirements will provide opportunity for us and our customers. Customers are asking us to continue to develop them and plans are in place for each one of them. Not only are they inexpensive to execute, they are low cost to continue developing at this stage, so we will continue to do so and begin making further decisions around them sometime in 2019.” The same basic slide is included in their August investor presentation.
We believe that at least 325,000 b/d of these “Other” projects looks executable for around 2020. We took the Enbridge list of “Mainline Expansion Opportunities” for 450,000 b/d as a starting point for our review. And what stuck in our mind was the comments from last year as Enbridge made a point of emphasizing the low cost and highly executable nature of these additions. To be clear, these are not their Line 3 replacement, these are projects separate from their 375,000 b/d Line 3 replacement project. We shouldn’t have been surprised to see they seem like low hanging fruit and identified projects that look to be highly likely to work and are to be impactful around 2020. Perhaps what surprised us the most is that these “Other” projects have been ignored by markets. After reviewing these projects, we came to the view that there is probably at least 325,000 b/d of additional available capacity on the mainline in and around 2020. (i)There is 75,000 b/d of DRA optimization. DRA is drag reducing agents. DRAs are not unique to Enbridge’s oil pipelines, they are working on other oil pipelines. We assume this will work. (ii) The BEP idle of 100,000 b/d is their Bakken expansion program that has underutilized capacity of 100,000 b/d. It is there for 2019. We assume this will work. (iii) The Line 13 reversal of 150,000 b/d is the potential reversal of their Line 13, which is also known as the Southern Lights pipeline that brings condensate from Illinois up to Edmonton so it can be blended with heavy oil for pipeline transportation. We believe the strong success of the condensate rich Duvernay and Montney is decreasing the need for condensate imports via this line, which at least provides the opportunity for condensate to be captured to replace the current Line 13 condensate volumes. Therefore we believe why Enbridge puts this as a highly executable project. We assume this will work. (iv) We do not have enough of a familiarity with the other two projects to get to the 450,000 b/d to include in our analysis, so have left off for now.
Enbridge’s Mainline Expansion Opportunities
Source: Enbridge August Investor Presentation
Canada’s added oil egress could be 700,000 b/d around 2020, almost double the market view of 375,000 b/d. These Enbridge other projects are why we believe Canada’s added oil egress could be 700,000 b/d around 2020, and almost double the market view of only 375,000 b/d. We took the earlier graph and added in the layer for what we call Enbridge “Other” projects ie. mainline expansion projects separate from Line 3’s 375,000 b/d. By layering in “Other”, it provides enough egress to cover CAPP’s forecast oil supply growth to 2025.
Enbridge Line 3, Enbridge “Other”, Keystone XL and Trans Mountain Expansion
Source: CAPP, SAF
Remember these projects expand “mainline” capacity and will allow them to move more medium/heavy oil to the Midwest and ultimately down to the Gulf Coast. We expect there will confusion on the nature of the projects and the benefits. There are three key concepts to keep in mind. (i) These are “mainline expansion opportunities”. Enbridge has been clear since their Dec 2017 investor day that these projects, if undertaken, will increase the mainline capacity. Their comments, the table, and the map all highlight that these individual projects will increase mainline capacity. (ii) These will benefit medium/heavy oil. Western Canada’s problem is primarily egress for heavy/medium oil. But that’s okay because these projects are all Enbridge projects. This is significant. because Enbridge can do some shifting of product on its pipelines. These projects will allow Enbridge to move more Cdn light oil outside of the mainline, which in turn will free up space on mainline that can be used to move medium/heavy oil on the mainline. (iii) Ultimately this will allow more medium/heavy to make its way down to the Gulf Coast.