On June 20, the 350 Mb/d Syncrude Upgrader experienced a power trip on a transformer forcing the production facility to shut, according to a company spokesman statement. A Suncor company spokesman said the project will be shut through July at least and they are performing a comprehensive assessment of when the site will return to service. Outside of this, the company communicated very little information. Rumored reports of a 92 percent cut to production for July recently circulated, which falls in line with the production impact the hydrotreater fire had last year.
News of the shutdown rippled across North America and global markets as the project represents approximately 8 percent of total Canadian oil production. While the impact is still unfolding, the unplanned shutdown of the facility last year gives us a few hypothetical scenarios to look at with the little information currently available, Mike Walls, Senior Crude Oil Analyst at Genscape explains.
Possible Production Impacts
Although Suncor is quiet to comment on the production impact thus far, a similar full shutdown happened last year due to the hydrotreater explosion on March 14, 2017. This reduced April volumes to 20 Mb/d and work continued at the facility through July 2017. Production averaged about 167 Mb/d in May 2017 through July 2017, according to Genscape’s Canadian Crude Oil Production Forecast. While we do not know the extent of the production impact yet, if it is assumed this total shutdown is similar to last year’s, we ballpark July production at near 20 Mb/d and possibly an ambitious return to service date of August at 190 Mb/d. Since the facility lost 10 days in June, we expect overall June volumes to curtail by ~100 Mb/d, leading to production in the ~180-200 Mb/d range for June. In addition to the impact on Syncrude production, a select few facilities producing SynBit may also experience impacts, the largest of these being the 140 Mb/d Conoco Phillips Surmont Project, which had a negative production impact in March 2017 when Syncrude shut unexpectedly.
Many in the market are already aware of the current pipeline constraint issue, so recently there was talk of pipeline space opening up due to the outage, giving the opportunity for heavy volumes to move on the traditional light lines of Enbridge’s Mainline System, such as Line 3 (390 Mb/d). Even though there are ongoing efforts to move heavier barrels on these lines such as the Canadian Heavy Sweet Blend (CHS), this requires a large amount of heavies to be blended into this grade, as opposed to the more traditional heavy blends coming from Western Canada. Although the outage has temporarily opened pipe space, this does not mean heavy volumes can now easily move on the traditional light lines.
Below are two scenarios in which light production is stacked up against light takeaway capacity, capacities include assumptions which take into account effective capacity and quality splits of lines coming out of Western Canada.
- While light lines have been apportioned in every month except April thus far in 2018, the unplanned extension of maintenance on SU Base Plant, CNRL Horizon and Syncrude in May caused SCO production to come in lower than expectations, per Genscape’s Canadian Crude Oil Production Forecast. However, if all upgraders returned to service without an issue we would see production outpace capacity in that month by approximately 100 Mb/d.
Post Shutdown Outlook
- The below scenario may be an ambitious timeline given the language of the facility being down “at least through July”, however, it shows the impact of light line capacity space for July production estimated at 20 Mb/d and into August, which we estimate near 190 Mb/d. For this scenario, August volumes would only outpace light lines by ~20 Mb/d. Any further delay to a return to service would lead to a prolonged period of space on the light lines. This would cause light barrels in storage to fill in or a possible incremental increase of heavy barrels as Enbridge continues to try and move more heavy grades on Line 3. As it stands currently, July would be near 260 Mb/d underutilized with the current production outlook, however record high crude inventories could help fill the gap on Enbridge Lines 2/3.
- Enbridge’s 2,665 Mb/d Canada-to-U.S. Mainline system (including lines 1-4 and 67) pipeline flows averaged about 105 Mb/d lower during the 2017 Syncrude outage, as compared to pre-outage 2017 rates, according to Genscape’s Canadian Pipeline Service.
Filling the Gap
While the production outage impacted the global market, Genscape’s Western Canadian Storage monitors reported record Canadian storage levels, which will help mute the impact in the short term. As apportionment for heavies has trended in the 40-50 percent range in the past 6 months, barrels have been backed up into storage as the market deals with a pipeline capacity issue. These excess stocks could be called upon to replace Syncrude production. Any prolonged outage will likely result in large draws in Western Canadian inventories such as we saw last year after the Syncrude hydrotreater explosion. However, Synthetic Crude Oil in storage may not be able to fill the gap for an extended period (such as the five months it took Syncrude to return to service in the event last year), even if other upgraders such as CNRL Horizon continue their strong production pace.
During the 2017 Syncrude outage, Western Canadian stocks decreased more than 13mn bbls between weeks ending March 17, 2017 and July 7, 2017, for a drain rate of 118 Mb/d. Most of the decline, near 8mn bbls, occurred at Hardisty, Alberta, while Edmonton stocks dropped nearly 4mn bbls. Amid resumed Syncrude production, increasing production elsewhere and constrained outbound pipeline capacity, stocks rebounded more than 18 mn bbls through the end of 2017 to end at 33mn bbls for week ending Dec. 29, 2017. Inventory levels in Western Canada reached a record high of 35mn bbls for week ending May 25 and were 17mn bbls higher than the July 2017 level, when Syncrude production resumed, for week ending June 22, according to Genscape’s Canadian Storage Report.
The price action for Western Canadian grades has been muted most likely due to the event occurring just after the Enbridge issues it’s Notice of Shipments (NOS) around the 20th of the month. This led to thin trading until the next trading period begins in the next month (July for August injections). Canadian Sweet Synthetic for August currently trades about $2.00/bbl lower than CME Light Sweet Crude (WTI), per CME. With the supply disruption we expect this discount to tighten or possibly flip into a premium with the current amount of supply offline. Western Canadian Select (WCS) could see a tightening effect as well due to SCO’s use as a diluent for Synbit blends.
Near Term Outlook
Clearly the Syncrude disruption rattled the market, not only in Western Canada but across the world. While the timeline for a return to service is uncertain, with unconfirmed estimates having the facility return after July, the near-term solution will be to draw from Canadian inventories and growing production in order to fill any extra pipe space left from the outage. Genscape’s Canada Pipeline Service monitors 88 percent of Canada to U.S. pipeline capacity in near-real-time. This data combined with Genscape’s Canadian Crude Oil Production Forecast and weekly snapshots of Western Canadian inventories, via Genscape’s Canada Crude Oil Storage Report, gives customers timely information on the impacts of the Syncrude shutdown.
For more information, visit: www.genscape.com
4th July 2018