Price rise little comfort for Canadian heavy oil producers
The outlook for Canadian heavy oil producers remained largely unchanged Monday, even after a joint statement by Russian and Saudi officials to extend OPEC production cuts lifted prices above last week’s lows.
Prices for crude benchmark West Texas Intermediate neared the US$50 threshold in Monday trading, before closing at US$48.85, up US$1.01 The rise came after Saudi energy minister Khalid alFalih and Russian energy minister Alexander Novak reached a verbal agreement on Monday to extend their supply curbs to March 2018, three months longer than many had predicted. The gesture calmed oil markets after a few turbulent sessions last week that sent prices plummeting.
However, the price increase is little comfort to Canadian oilsands producers, particularly as some analysts expect them to face a deeper discount for their crude in coming years relative to the U.S.
“We are also expecting a widening — sometime late next year, likely — because of pipeline constraints,” said Rory Johnston, a commodity economist at Scotiabank in Toronto.
He said he estimates the spread between WCS and WTI will widen to around US$18 in 2018, up from US$15.60 in the first 4.5 months of 2017, as more oil is expected to be shipped by rail.
The widening discount for Canadian crude would mark yet another setback for producers, who have been anticipating a rise in prices that has yet to materialize. New developments in Canada remain a long way off as prices remain locked at the US$50 range, much lower than analyst expectations one year ago.
“When it comes to these brownfield developments, the difference between US$50 and US$55 is not major,” said Nicholas Lupick, an analyst with AltaCorp Capital Inc. in Calgary.
“For a greenfield project you will need something closer to US$60.”
Stubbornly low oil prices come as some Canadian players make massive bets on the oilsands. In March, Canadian Natural Resources Ltd. purchased Royal Dutch Shell Plc for $12.74 billion, while Cenovus Energy Inc. bought ConocoPhillips Co. assets in the oilsands and Alberta Deep Basin for $17.7 billion.
Suncor Energy Inc., meanwhile, bought out oilsands rival Canadian Oil Sands for $6.6 billion in early 2016.
This month it also announced plans to begin the application process for its steam-driven Lewis development. The project is to begin construction in 2024.
Such acquisitions have weighed heavily on company balance sheets, as they assume sizable debt loads to fund the purchases. Cenovus in particular has said it aims to sell a range of assets following the acquisition, which at the time caused its share price to tumble.