Cdn Heavy Oil Differentials Should Narrow With The Good News That PHMSA Approves Keystone Restart

Nov 27, 2017


There was good news this afternoon when PHMSA signed off on the restart of Keystone Pipeline at reduced pressures tomorrow (Nov 28).  Keystone was only down for 12 days, which is a faster return than we expected given the tough public comments from the South Dakota PUC.  But the good news for Keystone is that the restart decision authority was from PHMSA and not the PUC.  The PUC is still a wildcard, but its potential impact is probably down the road a month or two, or whenever they finish their forensic analysis and can determine if TransCanada violated any permit conditions.   The Keystone restart is good news for Cdn heavy oil producers as Cdn heavy oil differentials should recapture some of the recent widening that happened once Keystone was shut in.  TransCanada did not disclose the exact level of reduced volumes to restart and what volumes are reached in the rampup and when, but the fact that PHMSA signed off on the restart should bring both an immediate positive tone and impact to Cdn heavy oil.   Even at reduced volumes, this is good news for Cdn heavy oil, especially given the declining oil production of the primary competitors to Gulf of Mexico refiners (Mexico and Venezuela) in 2016 and continuing in 2017.

PHMSA approves Keystone Pipeline restart at reduced pressures (volumes).    There was good news today for Keystone pipeline.   It has turned out well for TransCanada that PHMSA was the regulatory body with the authority to approve the restart of Keystone.   As expected, PHMSA stayed out of the media spotlight and focused on its review process.  This afternoon, TransCanada announced that PHMSA approved a restart of Keystone at reduced pressures (volumes) starting Nov 28, which is a much earlier time frame than we expected given the tough South Dakota PUC public comments.  TransCanada said “its Keystone Pipeline repair and restart plans have been reviewed by the Pipeline and Hazardous Materials Safety Administration (PHMSA) with no objections, permitting a safe and controlled return to service of the Keystone System.  As part of the reviewed plans, TransCanada will operate the pipeline at a reduced pressure starting on Tuesday, November 28, 2017, to ensure a safe and gradual increase in the volume of crude oil moving through the system”.   TransCanada did not disclose the original reduced volumes (the capacity of Keystone is 590,000 b/d) nor the expected ramp up volumes and timing.  But the PHMSA restart will bring both a positive tone and price impact for Cdn heavy oil.

No word yet from the South Dakota Public Utilities Commission (PUC), who have been visible in looking at the leak with a tough eye.  As of our 9pm MST cutoff, we have not seen any comments on the PUC website or comments from the PUC commissioners in the media.  All three of the PUC commissioners have been visible in their tough comments on the leak.  All three commissioners noted the need for the PUC to complete their forensic analysis to see if there were violations of the conditions to the permit that approved the Keystone pipeline.   These tough comments were the reason for why we believed a Keystone restart would take longer than expected.   Our prior blogs noted the good news that PHMSA was the regulator with the authority for the restart decision and not the PUC.  But our concern was that given the tough PUC comments, they would have been trying to impact the PHMSA restart decision process.  It would seem that PHMSA carried out its technical based analysis without worrying about the tough public comments from all three PUC commissioners.

The PUC probably wished PHMSA didn’t approve the restart until it had its view.    The PUC has not said where it is in its analysis, but they probably wished they were further along in its analysis before PHMSA approved the restart.  And that they could have presented a case to PHMSA to hold back on its restart decision.   We believe it makes it tougher for them to stop the Keystone restart without the basis for an injunction ie. their analysis.  At the same time, we have to believe it will be tough for the PUC to back away from their stated public comments to have a forensic analysis so it can determine if there were any violations of the conditions to the Keystone permit.  The PUC is still a wildcard, but its potential impact is probably down the road a month or two, or whenever they finish their forensic analysis and can determine if TransCanada violated any permit conditions.   Plus it is hard to see how the PUC can stop a restart without their analysis.   After all, the restart regulatory approval decision is from PHMSA.

The Keystone restart should lead to a narrowing of Mayan less WCS differentials.  The Keystone shut down led to a widening of Mayan less WCS differentials by $1.85/b to $14.40/b and a widening of the WTI less WCS differentials by $3.10/b to $17.25/b.   Keystone is restarting at a reduced undisclosed volume, which should limit how much of the discount is recaptured.   But we should still see an immediate reversal of some of the price impacts, potentially moving the Mayan less WCS differential back to somewhere around halfway the impact ie. back to a differential of ~$1.00/b for Mayan less WCS, and a differential of $15.75/b for WTI less WCS.  We would expect, all other things equal, to see the Keystone impact on differentials eliminated once Keystone is back to full volumes.  The other impact from the narrowing of Mayan less WCS is that it will send the differential ~$0.50 to $1.50/b below the $14 to $15 cost of rail to Gulf of Mexico.

Mayan Less WCS Differential US$/b

8

Source: Bloomberg

WTI Less WCS Differential US$/b

9

Source: Bloomberg

The negative to Cdn heavy oil differentials remains the Fort Hills startup.   Suncor’s For Hills project is scheduled to commence operations in Dec and ramp up to “achieve 90% of its planned production capacity of 194,000 barrels per day within 12 months”.  This will add another ~180,000 b/d of heavy oil in a market that is currently short of pipeline capacity.   It’s a good thing that Keystone is starting back up.

It was a good news day for Cdn heavy oil tone and prices with the PHMSA approval for a Keystone restart.   Keystone was shut in 12 days that seemed a lot longer given the impact it had on Cdn heavy oil.  It was a good news afternoon when TransCanada announced PHMSA signed off on a Keystone restart at reduced pressures (volumes).   The volumes were undisclosed, but the PHMSA sign off should bring an immediate positive impact on the Cdn heavy oil tone and price.  We don’t expect to see all the heavy oil price impact be recaptured as it is a restart at partial volumes.  But we could see a recapture of half of the discount, which would narrow the Mayan less WCS differential to ~$13.50/b and the WTI less WCS differential to ~$15.75/b.  The PUC is still a wildcard, but its potential impact is probably down the road a month or two, or whenever they finish their forensic analysis and can determine if TransCanada violated any permit conditions.  But the PUC isn’t likely a wildcard to stop the PHMSA return absent some data to support a reason to stop the restart.  It’s a good news day for Cdn heavy oil with the Keystone restart, which is timely given the fast approaching Fort Hills start up that will add ~180,000 b/d of heavy oil in 2018.