Price discounts expected to rise
Canadian oilsands producers face rising price discounts as growing production “materially exceeds” export pipeline capacity to the United States in the first quarter of 2018, RBC Dominion Securities says in a new research report.
The report comes as the price differential between oilsands crude and its U.S. counterpart posted recently widened to more than US$25 because of recent events including reduced volumes on the Keystone pipeline system between Alberta and the U.S. Gulf Coast after a leak in South Dakota.
Production from the northern Alberta oilsands is set to climb by nearly 620,000 barrels per day over the next four years to 3.3 million bpd in 2021 before levelling off, it says. About 75 per cent of the growth will be in raw bitumen — which must be blended with light petroleum products to flow in a pipeline, thus increasing volume by another 30 to 40 per cent.
“The oilsands are witnessing unprecedented growth that we now peg at roughly 250,000 barrels per day in 2017 and 315,000 bpd in 2018, before downshifting to roughly 180,000 bpd in 2019,” says the report from analyst Greg Pardy.
“This is a double-edged sword because Western Canada’s oil exports are set to materially exceed export pipeline capacity in the first quarter of 2018 — structurally widening Western Canadian Select spreads until new pipeline expansions move into place.”
The difference between WCS, a diluted bitumen crude, and West Texas Intermediate, a North American benchmark for conventional oil, will widen to average US$15.50 per barrel in 2018 and US$17.50 per barrel in 2019, the report says.
That’s $3.50 higher for both years than previous RBC forecasts. The average differential through the first 10 months of 2017 was US$11.86, versus US$13.71 through the same period of 2016, according to Alberta’s Energy ministry.
Stephen Kallir, an upstream analyst for Wood Mackenzie, said he agrees the average differential could be much higher than usual over the next few years.
“Whenever our producers aren’t getting the most value for their product it is a negative,” he said, adding the price outlook is part of the reason investment in new oilsands projects has dried up.
“If you look at what that down- side case is on pricing if we don’t get new pipe, all of a sudden the economics get even more challenged because you’re looking at a differential that’s quite a bit bigger than what we consider historical norms.”
He pointed out that Enbridge Inc. reported its oil export pipelines were fully spoken for earlier this week.
Oilsands output next year is forecast to grow mainly due to the ramp up of Suncor Energy Inc.’s 194,000bpd Fort Hills mine and Canadian Natural Resources Ltd.’s 80,000bpd Horizon mine expansion.