MEG Energy says Trans Mountain expansion will boost Canadian oil prices 'for years'

The recently completed Trans Mountain pipeline expansion will boost Canadian oil prices for "years" to come, an executive with oilsands producer MEG Energy Corp. said Tuesday.

"It is great for industry and Canada to have that tremendous asset available," said MEG's vice-president of marketing Erik Alson during a conference call with analysts to discuss the company's first-quarter earnings.

Canadian heavy oil has historically sold at a discount to lighter U.S. crude, in part due to differences in product quality and transportation costs, but also due to a lack of pipeline export capacity that has limited market access for Canadian oil.

At times, that discount has been severe.

Rising oilsands production and limited pipeline space in the fall of 2018 caused Canada's heavy oil benchmark price, known as Western Canada Select, to sell at nearly $50 US per barrel below the U.S. benchmark West Texas Intermediate. The government of Alberta ended up curtailing oil production in the province for a time to address the problem.

A similar problem occurred in 2012-13, prompting then-Alberta premier Alison Redford to blame what she called the "bitumen bubble" for a massive shortfall in government revenues.

A 2020 study by IHS Markit estimated that insufficient pipeline export capacity resulted in $14 billion US in lost value to Canada between 2015 and 2019.

But the Trans Mountain pipeline expansion is expected to change things. The expansion, which marked its official opening last week, gives Canadian oil shippers access to an additional 590,000 barrels-per-day of pipeline capacity and opens up new markets for oilsands product in Asia and along the U.S. Pacific Coast.

MEG is one of the main beneficiaries of the Trans Mountain expansion, with 20,000 barrels per day of contracted capacity on the pipeline.

In April, prices for Canadian heavy oil increased, and the WCS-WTI differential narrowed, in anticipation of the start-up of the pipeline expansion. Alson said Tuesday he expects that to be a long-term trend.

"With this critical infrastructure now complete, we anticipate light-heavy differentials will remain narrow for years," he said.

Oilsands companies have had years to ramp up their production in advance of Trans Mountain coming online, since the pipeline expansion was first proposed a dozen years ago and took more than four years to construct. Many analysts have suggested that the pipeline will quickly be filled, something Alson acknowledged.

"As an industry, we have a history of filling available egress, and I think that will happen again over time," he said.

"There are various estimates as to when that could occur. We've seen (projections) as recent as two years, others within five or six. Our thinking is closer to the outer end of that time frame."

Alson said he does not expect another oil pipeline to be built in Canada. But he said a potential future expansion of Enbridge Inc.'s Mainline pipeline network, which has been expanded many times in its 75-year history, could offer some relief to oil shippers once Trans Mountain is full.

He said there may also be ways to enhance the efficiency, or "de-bottleneck" other existing pipelines without starting from scratch with new construction.

MEG Energy Corp. said it earned $98 million in its first quarter, up from $81 million during the same quarter last year.

The Calgary-based company's revenues totalled $1.4 billion, down from $1.5 billion a year earlier.

Diluted earnings per share were 36 cents, up from 28 cents.

Bitumen production averaged about 104,000 barrels per day during the period ended March 31.

Former chief operating officer Darlene Gates stepped into the chief executive role at MEG on May 1, replacing outgoing CEO Derek Evans.