Will TransCanada Corporation (USA) (NYSE:TRP)'s Keystone XL pipeline save the oil sands? Probably not.
Even if the U.S. State Department approves the Keystone XL pipeline, Canadian crude will continue to trade at a discount, hampering production growth.
Massive production growth
According to the Canadian Association of Petroleum Producers, total western Canadian output is expected to increase 30% to 3.7 million b/d by 2015. Most of this growth will be driven by the oil sands as dozens of new in-situ projects come online.
In addition, fracking has transformed North Dakota into America's second largest oil producer producing 770,000 b/d in 2012. According to the U.S. Department of Energy, Bakken production is expected to rise to 1.15 million b/d by 2014.
Basically we have two rivers of oil all converging at the same spot in the upper Midwest. Whoever is willing to take the lowest price wins.
And the situation is only getting worse. This year, only 120,000 b/d of pipeline capacity is expected to open versus 250,000 b/d of new production coming online. Already we've seen shippers like Enbridge Inc (USA) (NYSE:ENB) ration capacity on its lines.
TransCanada Corporation (USA) (NYSE:TRP)'s Keystone XL pipeline is seen as a savior for the industry. If approved, the pipeline would ship 830,000 b/d of Alberta crude south to Gulf coast refineries. However, the project faces stiff resistance from environmental groups and still requires approval from the U.S. State Department before construction can begin.
But even if Keystone XL is built, it won't be enough to keep up with growing production from the Alberta oil sands and the Bakken.
Assuming both the Enbridge Inc (USA) (NYSE:ENB) Alberta Clipper and Keystone pipelines are built, which will add a combined one million b/d of new capacity, upstream production will still exceed transportation capacity by 2018.
To address this problem, pipeline companies are trying to access Asian markets by shipping crude to the west coast.
Enbridge Inc (USA) (NYSE:ENB)'s Northern Gateway pipeline proposal if approved, would ship 550,000 b/d from Edmonton Alberta to west coast town of Kitimat British Columbia. However, the $6 billion project was rejected by the B.C. provincial government over environmental risks.
Kinder Morgan Inc (NYSE:KMI)'s Trans Mountain extension proposal would increase capacity from 300,000 b/d to 890,000 b/d. However, this project faces mounting pressure from environmental groups. A recent spill on the same route last week has also diminished the chances of this project being approved.
But even if all four projects (Clipper, Keystone, Gateway, and Trans Mountain) are approved, energy production would still exceed pipeline capacity by 2023. Ten years is not a long period of time in the pipeline business.
Rails won't be enough
Rail roads have supplemented pipelines to cover gaps in transportation capacity. Because rail faces fewer political obstacles, over the past three years the number of crude rail car shipments has tripled.
Canadian National Railway (USA) (NYSE:CNI) has been a big beneficiary of this trend with analysts projecting oil shipments to reach 110,000 b/d this year. By 2014, Canadian National could ship 250,000 b/d by rail; by 2015, crude shipments could hit 300,000 b/d accounting for 7% to 8% of revenues.
But rails won't be able to cover the gap if pipelines aren't constructed. Already, the industry is struggling to keep up with demand due to a shortage of crude rail cars and loading terminals.