Midwest Pipelines Trim Rates as Alberta Fires Curb Oil Flows

  • Alberta Wildfires Reduced Supply, Slowed Pipeline Transits
  • Producer Price Index Adding to Pipeline Rate Cut Pressures

Midwest and Rocky Mountain pipeline operators have cut the cost of transporting oil, as they vie for a shrunken supply of crude in the aftermath of Alberta’s wildfires.

This week, several companies moved to lower tariffs for selected routes in those regions, including Tallgrass Energy Partners LP, Red Butte Pipe Line Co., Legacy Reserves LP and Suncor Energy Inc., starting July 1. Tallgrass reduced rates by about 2 percent on its Pony Express line heading into Ponca City, Oklahoma, while Suncor cut the same amount on its system in Wyoming, according to filings with the Federal Energy Regulatory Commission.

Fires that began early May in Fort McMurray shut about 1.2 million barrels a day of production in Canada’s oilsands region, according to company statements and data published in Alberta’s Spring Oil Sands Quarterly. That’s decreased demand for pipeline capacity and left transporters competing over a dwindling supply, said John Auers, executive vice-president at Turner Mason & Co., a Dallas consultant to the oil industry.

"By reducing tariffs, pipelines are competing for barrels that are still out there," Auers said by telephone. Without sufficient supplies, pipeline flows would decline while transit times would rise from the roughly 20 days of travel from western Canada to the Mid-Continent.

Production Resumed

Production resumed last week at some Canadian sites including that of Suncor, Athabasca Oil Corp. and Imperial Oil Ltd. “Inventories are only making up for pipeline flows, but I guess it’s not enough," Auers said.

According to industry data provider Genscape Inc., crude stocks in western Canada fell about 2 million barrels for the week ending May 20 to 22 million.

Pipeline rates have also fallen due to a decline in last year’s producer price index, a U.S. government measure of inflation which regulators take into account when reviewing transportation costs.

"Unfortunately for pipeline companies, this year that index will result in a reduction in pipeline tariff, "said Andy Lipow, president of Houston-based Lipow Oil Associates LLC.

Oil pipelines in North America are regulated by FERC and part of those regulations deal with how much a pipeline company can raise or lower pipeline tariffs.

Officials with Suncor, Tallgrass, Legacy Resources didn’t immediately respond to e-mails or calls seeking comment. Marathon Oil Corp.-owned Red Butte Pipe Line had no comment.

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