RPT-Bottlenecks expected as more Canadian oil meets tight pipe space

(Repeats story from earlier with no changes)
By Catherine Ngai
CALGARY, Alberta, July 11 (Reuters) - Deeply-discounted
prices for heavy crude from the heart of Alberta's oil sands
look set to sink further, thanks to hundreds of thousands of
barrels of new supply that will have difficulty finding space in
crowded pipelines, traders say.
It would be another hit for Canada's ailing oil sands
producers, who have slashed millions in capital expenditures and
been forced to lay off thousands of workers over the two-year
downturn in oil prices.
Until recently, pipeline space in Alberta has not been an
issue as May wildfires took about half of the oil sands'
production capacity offline. But most of that production is now
back, and more bitumen is set to come online in late 2016 and
early 2017, without additional infrastructure to move it.
Traders are already starting to sell off foward prices for
Western Canadian Select, the heavy crude benchmark. On Friday,
it settled at $15 a barrel below the U.S. West Texas
Intermediate crude CLc1 benchmark, according to Shorcan Energy
brokers. A month ago, it was trading at a $14.72 discount.
Traders say it could fall another $2 to $3 in coming weeks
as U.S. refiners move into heavy fall maintenance.
Current in situ bitumen supply is estimated at between 1.3
to 1.4 million bpd; non-upgraded bitumen supply is expected to
rise by 200,000 bpd in 2016 and by another 110,000 bpd in 2017,
RBC Capital Markets said earlier this year. Canadian producers
have some of the highest cost structures among those in North
America, so limited pipeline space to deliver that crude will
hurt profits.
"There's a fair amount of juggling that pipeline companies
can do with crude oil, and they haven't been running up against
those limitations for the past several months because of the
wildfires," said Sandy Fielden, director of commodities and
energy research at Morningstar.
"If production expands, though, we'll see congestion in the
system. Heavy crude will get discounted further against WTI and
price spreads will then blow out," he added.
The main pipelines carrying heavy oil into the U.S. Midwest,
including the Line 4 and 67 part of Enbridge Inc's ENB.TO
Mainline system, as well as TransCanada Corp 's TRP.TO
Keystone pipeline, have no little to no space for additional
barrels, according to four physical traders who move oil on
those lines.
Plans for additional output include Cenovus Energy Inc's
CVE.TO Christina Lake phase F and Foster Creek phase G
expansions in the third quarter, which will ramp up to 390,000
bpd on a gross basis over the next 12 to 18 months, as well as
Husky Energy's HSE.TO 60,000 bpd Sunrise project in early
2017.
The impending squeeze is reminiscent of 2013, when Alberta's
government was forced to borrow billions to cover a drop in
revenue due to the so-called "bitumen bubble," a term coined as
a result of the province's inability to move oil-sands derived
bitumen to export, although WCS prices hovered closer to $40 a
barrel discount then.
Enbridge Inc ENB.TO recently told shippers that it will
allocate a heavier synthetic crude, known as OSH, along its Line
3 pipeline, which had been running only light crude in the
second quarter, according to two trading sources familiar with
the plans.
A company spokesman confirmed that its Mainline was running
at full capacity and moving record volumes, with averages of 2.5
million bpd from Gretna, Manitoba. He declined to comment on
deliveries on Line 3.
At a TD Energy Conference in Calgary on July 6, Kristopher
Smith, Suncor Energy 's SU.TO executive vice president for
refining and marketing, said producers are likely to "hit a
(capacity) pinchpoint in the next few years," pointing to the
overbuild in rail capacity as a short-term fix.
However, analysts said prices will need to keep falling
before that makes economic sense.