Al­berta’s out­put cuts mak­ing crude ship­ments too pricey

In­creased oil price has been a prob­lem for ship­pers with­out com­mit­ted vol­umes

Calgary Herald - - FINANCIAL POST - ROBERT TUT­TLE

Al­berta’s plan to boost crude prices through manda­tory pro­duc­tion cuts is work­ing a lit­tle too well.

Just over a week af­ter Pre­mier Rachel Not­ley an­nounced oil pro­duc­ers will be re­quired to cur­tail out­put by 8.7 per cent, the price of heavy Cana­dian crude has more than dou­bled, in some cases ren­der­ing West­ern Cana­dian Select too ex­pen­sive to ship south to U.S. Gulf Coast re­fin­ers.

Al­berta’s heavy oil traded at about US$41 a bar­rel on Tues­day, about US$9 less than on the U.S. Gulf Coast, ac­cord­ing to traders and data com­piled by Bloomberg.

For a ship­per with­out com­mit­ted vol­umes, that price dif­fer­ence is so small that it wouldn’t cover the costs of ship­ping it down ei­ther Tran­sCanada Corp.’s Key­stone pipe­line to Hous­ton or En­bridge Inc.’s pipe­line sys­tem. Gulf Coast im­ported about 500,000 bar­rels a day of Cana­dian crude in Septem­ber.

“Ev­ery­one is bid­ding up those bar­rels to make sure they can cover their pipe space,” said Mike Walls, a Gen­scape an­a­lyst. “Peo­ple are re­ally just hy­per-fo­cused on Jan­uary and that’s why you are see­ing these dra­matic price moves.”

For com­pa­nies with­out com­mit­ments to ship reg­u­lar vol­umes, a bar­rel of crude sent down the Key­stone sys­tem from Hardisty, Alta., to Hous­ton will cost more than US$15.50 a bar­rel start­ing Jan. 1, ac­cord­ing to the tar­iff filed with the U.S. Fed­eral En­ergy Reg­u­la­tory Com­mis­sion and the Na­tional En­ergy Board.

The cost to ship un­com­mit­ted vol­umes to Texas from Hardisty down Flana­gan South via the En­bridge main­line is about US$9.40 a bar­rel in­clud­ing a sep­a­rate power charge, ac­cord­ing to a fil­ing with the Na­tional En­ergy Board.

Al­berta’s Dec. 2 an­nounce­ment, wel­comed by some oil com­pa­nies as nec­es­sary and crit­i­cized by others as an ex­am­ple of govern­ment over­reach, came af­ter heavy Cana­dian crude prices shrank to less than US$14 a bar­rel last month, the low­est in at least 10 years. A surge of pro­duc­tion met lim­ited pipe­line space, which was caus­ing bot­tle­necks. The man­date will re­move 325,000 bar­rels a day from the mar­ket in Jan­uary be­fore drop­ping to 95,000 bar­rels a day by the end of the year.

Since cuts were an­nounced, West­ern Cana­dian Select crude has surged to al­most US$41 a bar­rel, about US$11 less than the West Texas In­ter­me­di­ate fu­tures price. The price dif­fer­ence be­tween WCS and WTI was as wide as US$50 a bar­rel in Oc­to­ber.

This nar­row dif­fer­en­tial won’t last, ac­cord­ing to Walls and Sandy Fielden, an an­a­lyst at Morn­ingstar Inc.

As long as the pipes are full, the price dif­fer­ence be­tween Cana­dian heavy crude and West Texas In­ter­me­di­ate fu­tures will nec­es­sar­ily widen enough to cover the costs of ship­ping the crude by rail to the Gulf, which is be­tween US$18 and US$22 a bar­rel, Walls said. Al­berta’s NDP govern­ment has tried to stim­u­late crude-by rail ship­ments by an­nounc­ing plans to pur­chase rail tanker cars.

“The pipe­lines are chock full and they will stay chock full,” Fielden said Mon­day.

WCS’s dis­count to WTI widened US$1 to US$12 a bar­rel on Wednes­day af­ter En­bridge an­nounced ad­di­tional ra­tioning this month on its pipe­line sys­tem be­cause of a power cut in Saskatchewan last week that shut some of its main­line sys­tem.

Not­ley on Mon­day also an­nounced that the prov­ince is seek­ing in­vestors in­ter­ested in build­ing a new re­fin­ery in Al­berta as a way of im­prov­ing the prices re­ceived for the prov­ince’s oil.

JONATHAN HAY­WARD/ THE CANA­DIAN PRESS

The Trans Moun­tain pipe­line fa­cil­ity in Ed­mon­ton. De­spite some cost con­cerns, the price dif­fer­ence be­tween Cana­dian heavy crude and WTI fu­tures is fore­cast to widen enough to cover the costs of ship­ping the crude by rail to the Gulf amid bot­tle­necks.

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