Cost of oil discounts counted in billions
LIMITED PIPELINE CAPACITY TAKES TOLL
Imagine producing a bumper crop of a product in high demand around the globe, only to learn you must settle for a discounted price because there’s no easy way to get your product to market.
Canadian grain farmers experienced that situation in 2013 and again last winter when their harvest outstripped the transport capacity of Canada’s rail companies. Western Canada’s oil companies are now in the same boat thanks to production gains that have not been matched by export pipeline capacity gains.
Like those farmers, oil producers have filled storage to bursting while they wait for a solution to appear. The price discounts or “differentials” that had mainly affected heavy oil have spread to light oil and upgraded synthetic oilsands crude as pipeline space tightens.
Estimates on the cost to the economy vary wildly, but the Canadian Association of Petroleum Producers officially estimates the impact as at least C$13 billion in the first 10 months of 2018.
It estimates the cost at about C$50 million per day in October as discounts for Western Canadian Select bitumen-blend crude oil versus New York-traded West Texas Intermediate peaked at more than US$52 per barrel.
“The differential has blown out to such an extreme level for two reasons, the lack of access to markets and the fact we really have only one customer (the United States),” said Tim McMillan, CEO of CAPP.
Getting an exact number on how much discounts are costing Canada is all but impossible thanks to ingrained sector secrecy about transportation and marketing, he said, adding it’s entirely possible the real costs could be as high as $100 billion per year.
Producers’ exposure to WCS prices differ depending on what kind of oil they produce, where they sell it and how they transport it.
Calgary-based Imperial Oil Ltd., for instance, says about one-quarter of its output of 300,000 barrels of bitumen per day is influenced by WCS pricing — the rest is used in its Canadian refineries or shipped by pipe or rail to the U.S. Gulf Coast where it gets close to WTI prices.
The company announced last week it will build a 75,000-bpd oilsands project, going on faith that pipelines will be in place for when production begins in about four years (a prospect that took a hit Thursday when a U.S. judge put TransCanada Corp.’s Keystone XL pipeline on hold until more environmental study is done).
Meanwhile, it is ramping up rail shipments from its co-owned Edmonton terminal as fast as it can.
Other oilsands producers including Canadian Natural Resources Ltd. and Cenovus Energy Inc. are cutting production to avoid selling at current prices.
The industry’s problems receive little sympathy from environmentalists like Keith Stewart of Greenpeace.
“The root of the problem is that companies kept expanding production even when they knew there was no new transport,” he said.
But McMillan pointed out it takes years to plan, win regulatory approval and build projects.