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Canadian Midstream companies evaluate spending in uncertain times

A select number of Canadian midstream companies have announced downward revisions to their 2020 capex plans in response to the plunge in global oil prices and trajectory of the coronavirus disease 2019 (COVID-19).

The western Canadian NGL market began 2020 with a sense of optimism thanks to increasing global LPG demand and the continued expansion of export capabilities. AltaGas's Ridley Island Propane Export Terminal, with a nameplate capacity of 40,000 b/d, began operations in 2019. Meanwhile, Pembina's Prince Rupert Terminal, with an initial export capacity of 25,000 b/d, was slated to begin operations by the second half of 2020.

Strong international demand resulted in AltaGas announcing in early January that it expected that export volumes would be in excess of 50,000 b/d by the end of 2020. Similarly, Pembina announced in late 2019 that its export terminal would expand by an additional 15,000 b/d by the second half of 2023.

However, in a relatively short period outlooks have changed drastically. The coronavirus disease 2019 (COVID-19) created a large, immediate reduction in crude demand in mainland China and then Asia and is now spreading around the world. Saudi Arabia, which initially sought to deepen its supply restraint with Russia and the rest of OPEC, rapidly reversed course and has opened the taps, compounding an already growing surplus of oil. As a result, crude prices have plunged to record lows in western Canada.

Canadian E&P companies have announced capital spending cuts that stand at US$4.3 billion (nearly C$6.3 billion) for 2020 in response to the dramatic plunge in global oil prices and trajectory of COVID-19.1 The immediate impact of these cuts will be a reduction in conventional drilling and reduced oil sands spending.

IHS Markit expects Canadian NGL production to remain resilient in the short term owing to continued unconventional gas drilling. If the low-price environment continues into the late summer and early fall, or if condensate demand falls, drilling activity in gas plays would likely be cut as well.

In response to these unfolding events, Pembina announced a reduction to the company's 2020 capital spending plans between C$900 million and C$1.1 billion. Pembina now expects its revised 2020 capital budget to be C$1.2-1.4 billion, representing a 40-50% reduction. This decision will result in the deferment of some previously announced expansion projects.

These projects include

  • Peace Pipeline Phase VII, VIII, and IX expansions
  • Empress cogeneration facility
  • Prince Rupert Terminal expansion
  • Pembina's investment in the integrated propane dehydrogenation plant and polypropylene upgrading facility

It is unclear at this time how these deferments in capital spending will alter project timelines, but delays are expected.

Inter Pipeline announced that its 2020 capital spending would be decreased by only C$60-120 million. Previously, the company had announced a C$1.2 billion capex program for 2020. The company plans to reduce discretionary expenditures but will continue as planned with its primary focus of the construction of the Heartland Petrochemical Complex.

Similarly, Keyera reiterated its continued confidence, and the company still expects to invest between C$700 million and C$800 million in 2020. This capital investment will be directed toward the completion of the second phase of the Wapiti gas plant and the Wildhorse terminal, as well as further investment into the Pipestone gas plant and the Key Access Pipeline System (KAPS).

Both Inter Pipeline and Keyera have stated that they will continue to monitor the volatile and tremulous situation. Enbridge, Plains Midstream Canada, and TC Energy have yet to announce their 2020 capital spending plans. Typically, most midstream capital projects are supported by long-term agreements. It is possible that through ongoing discussions with customers, midstream companies may further reduce or defer capex.

IHS Markit proprietary supply, demand and price forecasts for NGLs (ethane, propane, normal/isobutane and natural gasoline) help our clients tackle some of the most difficult times and make better investment and purchase decisions.
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Posted 31 March 2020 by Bill Rawlusyk, Executive Director, North American NGL Markets, IHS Markit and

Jordan Woloschuk, Senior Research Analyst, Midstream Oil & NGL, IHS Markit

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