Fresh 28% collapse for Canadian heavy oil

CALGARY Canadian heavy oil prices plunged to a new low on Friday that could force the domestic oilsands sector to shut in production to survive the historic collapse, says a new report from Wood Mackenzie.

The price of Western Canada Select, the domestic heavy oil benchmark, followed up a brutal 30 per cent plunge on Thursday with another 28 per cent fall on Friday to reach US$4.58 per barrel — just a fraction of other price benchmarks.

The global Brent benchmark fell seven per cent in midday trading to US$24.39 per barrel, while the North American benchmark West Texas Intermediate fell five per cent to US$21.46 per barrel.

Energy research firm Wood Mackenzie believes higher cost oil-producing formations around the world would need to shut in production amid the oil price rout, unlike in 2014 when sub US$35 per barrel Brent oil prices lasted for only one quarter. These prices are well below the break-even cost for the Canadian oilsands producers, which risks posting massive losses this year as low prices persist.

“Canada’s oilsands are at the upper end of the (cost) curve, even in a benign price environment,” said Fraser Mckay, vice-president, upstream at Wood Mackenzie, in a report released Friday.

He noted that if the Brent crude oil benchmark averages US$35 per barrel over 2020, “we would expect corporate cash flow from the sector to be US$17 billion in the red,” and the Alberta government would also forego $2 billion in royalties.

While the costs are high, Mckay noted that it’s difficult to shut in or suspend oilsands operations as steam-based producers are concerned that letting a formation go cold would damage the reservoirs. “The sector will do everything it can to trim costs first,” he said.

Some of the largest oilsands producers, such as Suncor and Athabasca Oil Corp., have been forced to react to benchmark crudes hitting historic lows, and have limited or shut down operations.

About 125,000 barrels a day of production is currently shut-in and nearly all oilsands operations are underwater, which “will likely trigger additional production shutins,” TD Securities said in a note.

Currently, Canadian heavy crude costs less than the price paid by a company with long-term contracts to ship it down Enbridge Inc.’s Mainline and Flanagan South systems to Texas.

The S&P/TSX Capped Energy Index was down 8.65 per cent on Friday, taking its year-to-date decline to nearly 65 per cent.