Pipeline Constraints Reemerge as Canadian Oil Output Reaches New Heights
The Canadian oil industry's two-year period of relief from pipeline bottlenecks appears to be ending as surging production collides with renewed capacity constraints. This development comes at a particularly challenging time, with global crude prices declining due to oversupply in international markets.
Enbridge Implements Significant Rationing Measures
Enbridge Inc. has implemented the most substantial rationing on its Mainline pipeline system since March 2024, requiring shippers to reduce their requested volumes by significant percentages. For February, the company mandated a 22 percent reduction for dense, high-sulfur oil from Alberta's oil sands and a 24 percent cut for light crude shipments.
This practice, known as apportionment, represents a notable shift from recent conditions. The expanded Trans Mountain pipeline, which began operations in May 2024, had previously added nearly 600,000 barrels per day of export capacity for Western Canadian producers, temporarily alleviating transportation constraints.
Widening Price Discounts and Global Competition
The increased rationing threatens to expand the discount for Canadian heavy crude relative to U.S. benchmarks at a time when oil prices are already under pressure. The discount for Canadian heavy crude in Alberta compared to the monthly average for West Texas Intermediate has already widened to approximately US$14.80 per barrel, up from about US$13 before recent geopolitical developments.
This situation has been exacerbated by the U.S. overthrow of Venezuelan President Nicolás Maduro earlier this month. The United States has announced plans to sell up to 50 million barrels of Venezuelan crude onto international markets, creating direct competition for Canadian heavy oil due to their similar grade characteristics.
Production Records and Historical Context
Alberta's oil production reached a record 4.4 million barrels per day in November, according to provincial data. The province accounts for approximately 85 percent of Canada's total oil output, positioning the country as the world's fourth-largest producer behind the United States, Russia, and Saudi Arabia.
The current situation contrasts sharply with the nearly two years of ample pipeline capacity that followed the Trans Mountain expansion. During this period, Canadian heavy crude traded at an average discount of about US$12 per barrel to the U.S. benchmark, a significant improvement from the nearly US$17 per barrel discount experienced in the year before the expansion.
Pipeline bottlenecks previously became so severe that Alberta imposed production limits on large producers in 2018, when the discount on heavy crude surged to nearly US$50 per barrel.
Future Expansion Plans and Industry Response
Despite current constraints, pipeline companies are already planning additional capacity expansions to accommodate growing production. Enbridge reached a final investment decision in November to add 150,000 barrels per day of capacity to its Mainline system and 100,000 barrels per day to its Flanagan South system, with an estimated cost of approximately US$1.4 billion.
Trans Mountain Corporation plans to increase capacity to 1.25 million barrels per day over the next four to five years, up from the current 890,000 barrels, through the implementation of drag-reducing agents and additional pumping capacity.
The most ambitious proposal involves building a new one million-barrel-per-day oil pipeline to British Columbia's coast, a project led by Alberta with federal government support. A formal proposal for this initiative is expected later this year.
The return of pipeline constraints highlights the ongoing challenges facing Canada's oil industry as it balances production growth with transportation infrastructure limitations in an increasingly competitive global market.
