OIL SEC­TOR IN CRI­SIS MODE OVER ‘CRAZY’ PRICES

Calgary Herald - - CITY+REGION - CHRIS VAR­COE Chris Var­coe is a Cal­gary Her­ald colum­nist. cvar­coe@post­media.com

The blue-light spe­cial price for Cana­dian oil has reached ridicu­lous lev­els — and it’s get­ting worse.

The price for Western Cana­dian Se­lect (WCS) crude fell to just US$26 a bar­rel on Thurs­day, while bench­mark West Texas In­ter­me­di­ate crude closed at $71.98.

At one point, the price dif­fer­en­tial sat at US$52 a bar­rel, ac­cord­ing to Bloomberg, and it didn’t get much bet­ter on Fri­day, with the dis­count clos­ing at $48.50 a bar­rel.

“It’s a cri­sis,” Tim McMil­lan, chief ex­ec­u­tive of the Cana­dian As­so­ci­a­tion of Petroleum Pro­duc­ers, said Fri­day.

“When we were can­celling pipe­line projects over the last decade, this was the end re­sult we should have ex­pected.”

Ris­ing pro­duc­tion, a lack of pipe­line ca­pac­ity to move oil out of Western Canada, and sev­eral re­finer­ies un­der­go­ing main­te­nance in the U.S. Mid­west have con­spired to put the bite on Cana­dian oil prices.

It’s not un­usual to see the price dis­count on WCS fluc­tu­ate, but the gap has sig­nif­i­cantly widened this year.

Last Oc­to­ber, the price dif­fer­en­tial av­er­aged US$11.71 a bar­rel, ac­cord­ing to provin­cial data.

The dis­count is also spread­ing to the light oil blend Ed­mon­ton Par, which traded at a $28.50 dis­count to West Texas In­ter­me­di­ate crude on Fri­day.

“Right now, Canada is the cheap­est place in the world to buy bar­rels. We are ba­si­cally giv­ing this stuff away,” said an­a­lyst Martin King of GMP First En­ergy.

An­a­lysts say U.S. re­fin­ery out­ages at this time of year of­ten cut back on Cana­dian oil de­mand by about 550,000 bar­rels per day, but that num­ber has nearly dou­bled this fall and likely won’t be re­solved for sev­eral weeks.

Ship­ments of oil by rail climbed ear­lier in the year, but ap­pear to have stalled.

“We are op­er­at­ing right on the knife’s edge on egress out of Al­berta,” said Sco­tia­bank com­mod­ity econ­o­mist Rory John­ston.

“It’s not just about heavy (oil), it’s about all Cana­dian oil that is get­ting pun­ished here by the lack of pipe­line ca­pac­ity.”

If it doesn’t shrink soon, the dis­count will have con­se­quences for petroleum pro­duc­ers, fu­ture in­dus­try cap­i­tal spend­ing, and rev­enue for gov­ern­ments.

Ev­ery $1 in­crease in the price dis­count for Western Cana­dian heavy oil over the course of a year will cost the Al­berta trea­sury about $210 mil­lion.

White­cap Re­sources CEO Grant Fager­heim es­ti­mates the price dif­fer­en­tial will cost all pro­duc­ers up to $100 mil­lion a day in lost rev­enues at cur­rent lev­els.

Other es­ti­mates are smaller, but the key point is rev­enue is be­ing lost be­cause of the coun­try’s in­abil­ity to build new pipe­lines and get re­sources to mar­ket in the most ef­fi­cient man­ner pos­si­ble.

“Heavy oil pro­duc­ers are get­ting 40 per cent of what they nor­mally would be paid if we had ac­cess to mar­kets,” said Fager­heim. “It’s crazy, crazy, crazy.” Canada’s pipe­line sys­tem has the ca­pac­ity to ex­port about four mil­lion bar­rels a day and its space is cur­rently be­ing ra­tioned.

Western Cana­dian crude sup­plies con­tinue to rise and are ex­pected to av­er­age 4.4 mil­lion bar­rels per day this year, climb­ing to 4.7 mil­lion bpd in 2019, said an­a­lyst Kevin Birn of con­sul­tancy IHS En­ergy.

With com­pa­nies pre­par­ing their 2019 spend­ing plans, pro­duc­ers will be hard pressed to make in­vest­ment de­ci­sions in such a volatile price en­vi­ron­ment, he warned.

“We are leav­ing a lot on the ta­ble ev­ery day in terms of the value of crude, but we’re los­ing out as well on the in­vest­ment that could be oc­cur­ring,” Birn said.

The press­ing ques­tion is what can be done about it in the short­term?

The short an­swer: Not much. Un­til En­bridge’s Line 3 re­place­ment pro­ject is com­pleted (ex­pected later next year), pro­duc­ers and an­a­lysts say the only ob­vi­ous near-term fix is to ship more oil by rail.

How­ever, the rail sec­tor faces its own lim­i­ta­tions, such as a lack of ad­di­tional lo­co­mo­tives to han­dle the in­creas­ing de­mand.

Provin­cial of­fi­cials are watch­ing the si­t­u­a­tion, and vow to keep press­ing to see new pipe­lines built.

“We are also look­ing very closely at all op­tions that could help ease the dif­fer­en­tial in the short term, in­clud­ing ap­por­tion­ment on ex­ist­ing pipe­lines and mea­sures to ad­dress rail con­straints,” En­ergy Min­is­ter McCuaig-Boyd said in a state­ment.

The im­pact of the grow­ing dis­count on Cana­dian oil won’t take long to af­fect petroleum pro­duc­ers.

Less cash flow for pro­duc­ers means less drilling ac­tiv­ity and fewer jobs in the sec­tor, said the head of Pre­ci­sion Drilling.

The widen­ing dif­fer­en­tial means the drilling out­look in Canada will be di­min­ished head­ing into the new year, Pre­ci­sion’s Kevin Neveu told re­porters this week.

Ear­lier this year, Sco­tia­bank fore­cast the Cana­dian oil­patch would be stuck for at least 18 months in a pe­riod of con­strained take-away ca­pac­ity, po­ten­tially shav­ing $15.6 bil­lion in rev­enues from the sec­tor this year.

John­ston said rail ship­ments, which sat at 200,000 bar­rels per day in the sum­mer, will grow to near 300,000 by the end of the year and con­tinue to climb in 2019.

As the U.S. re­finer­ies come back on line later in the year, he be­lieves the pres­sure on Cana­dian oil prices should ease.

But the longer-term so­lu­tion is to build new pipe­line projects like the Trans Moun­tain ex­pan­sion, Line 3 and Key­stone XL.

McMil­lan said he would wel­come an emer­gency meet­ing with provin­cial and fed­eral gov­ern­ment of­fi­cials to look for other so­lu­tions, but noted: “There is no sil­ver bul­let here.”

The core of the prob­lem is that pipe­line projects that could have gone ahead sev­eral years ago have been de­layed or de­railed.

As oil pro­duc­tion con­tin­ues to in­crease, the price dis­count will re­main a headache in 2019.

“There is not an im­me­di­ate fix to this, un­less some pro­duc­ers start sus­pend­ing their pro­duc­tion,” added Fager­heim.

“We have put our­selves in such a dif­fi­cult si­t­u­a­tion. To me it’s stag­ger­ing what we’ve done.”

JUSTIN TANG/THE CANA­DIAN PRESS/FILES

Tim McMil­lan, chief ex­ec­u­tive of the Cana­dian As­so­ci­a­tion of Petroleum Pro­duc­ers, said the “cri­sis” in prices is the re­sult of can­celling pipe­line projects over the last decade.

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