Canadian oil pipeline congestion sets up lucrative storage play

FILE PHOTO: Crude oil storage tanks at Enbridge’s facility in Sherwood Park are seen against the skyline of Edmonton, Alberta REUTERS/Chris Helgren

CALGARY, Alberta/NEW YORK (Reuters) – Upheavals in the Canadian crude market are providing unique opportunities for firms with sizeable long-term leases on Alberta storage tanks, a cluster that sources say includes Mercuria Energy Group and oil major BP Plc’s trading arm. Canada holds the world’s third-largest crude reserves, but years of delay in building new pipelines has led to oil production outpacing takeaway capacity. A glut of crude has thus been created, increasing demand for storage tanks in the oil sands province of Alberta, which this year introduced production cuts to deal with the oversupply. The opportunity for traders comes from monthly pipeline “apportionment”, when demand to ship crude on certain pipelines exceeds capacity, forcing pipeline operators to ration the number of barrels each shipper can move. The practice is a long standing source of frustration for Canadian producers but offers a lucrative, though risky, play for traders able to swoop in and capitalize on post-apportionment price volatility. Bulging storage tanks are contributing to high apportionment on Canada’s main conduit to the United States, the 2.85 million barrel-per-day (bpd) Enbridge Mainline network.

Even with the Alberta cuts, oil inventories in western Canada hit a record 37.1 million barrels in April and are close to 34 million barrels in May, according to energy information provider Genscape.

One Calgary-based trader said that 37 million barrels is as full as storage can get and that anybody with tankage has been making money. Genscape monitors roughly 62 million barrels of storage in western Canada but at most only 67% is utilized because of pipeline operations and the need to separate grades. Some traders and storage companies are benefiting. BP does not disclose its storage lease position in Canada but the company owns large refineries in the U.S. Midwest which run Canadian heavy crude. BP also declined to comment. Storage rates are not publicly disclosed and vary widely, with long-term tankage cheaper than short-term. One trading source said three-month deals were being offered at around $2 per barrel per month. A four-year deal in Canada costs about $1.50 a barrel a month compared to 30-40 cents per barrel in the U.S. Gulf Coast, other sources said. Monthly storage rates at the U.S. futures hub of Cushing, Oklahoma, are about 30 cents a barrel. Gibson is the dominant storage owner in Hardisty, with 10 million barrels built and this year sanctioned another 2.5 million barrels. Its storage contracts are all long-term leases, averaging 10 years, and its main customers are large oil sands producers. “We get requests all the time for short-term storage but we do not have tanks to do that,” Gibson Chief Executive Officer Steve Spaulding said. Nick Bit: Despite the bullshit the most expensive oil in the world is from the US and Canada is locked up because of lack of pipelines and oil terminals… Here is a news flash the few new pipelines planned are years away….