National Post

CANADIAN OIL PRICES STOPPED IN THEIR TRACKS

LEADING RAILWAY REFUSES TO BE ‘SWING SHIPPER’

- Claudia Cattaneo Financial Post ccattaneo@ nationalpo­st. com

The global price of oil is recovering, but prices for Western Canadian crude are falling back to depressed conditions, the result of transporta­tion capacity so tight every twitch in the system appears to be blowing out the discount.

The latest scare to Canadian oil came last week from Canadian Pacific Railway Ltd., which said it has no interest in carrying big quantities of Western Canadian product while producers wait for pipelines to get built.

“We understand crude is only going to be here for a limited period of time,” CP Rail CEO Keith Creel said to analysts in a conference call Wednesday to discuss fourth- quarter results. “We are looking for strategic partners with long- term objectives that allows us to have a more stable book of business.”

The railway expects its crude volumes to increase this year, to 60,000 carloads from 48,000 in 2017, but Creel said space would go to those who “appreciate that capacity” and CP will not allow itself to be “commoditiz­ed.”

Western Canadian Select ( WSC), the Canadian benchmark, was changing hands for $33.57 a barrel Tuesday, after losing about $ 8 in two days, while West Texas Intermedia­te ( WTI) was going for US$ 64.75, up US$1.35 over the same period.

Canada exports about 3.2 million barrels of oil a day to the United States of different qualities. The discount means a daily loss of tens of millions in revenue, taxes and royalties for Canadian producers and government­s, and a correspond­ing gain for their counterpar­ts in the U.S., its only export market.

Tim Pickering, founder and chief investment officer of Calgary commoditie­s trading firm Auspice Capital Advisors, said railroads seem to have figured out that pipelines aren’t readily available for at least the next three years and are refusing to be that “swing shipper.”

“This has put railroads in a negotiatin­g position whereby they are asking for longer and longer terms,” Pickering said. “To the best of our knowledge, producers have been firm in their stance and have seemingly resisted on both price and term.”

Pipelines are so full that barrels in the system are backed up into storage tanks and access has been apportione­d, Pickering said.

It doesn’t help that TransCanad­a Corp.’s Keystone pipeline is operating at 20 per cent reduced pressure two months after a leak in South Dakota shut it down — a restrictio­n imposed by the U. S. Pipeline and Hazardous Materials Safety Administra­tion.

New capacity — Kinder Morgan’s Trans Mountain expansion, TransCanad­a’s Keystone XL and Enbridge Inc.’s Line 3 — is not ex- pected until 2020 or later due to regulatory delays and legal challenges.

Peter Howard, president emeritus of the Canadian Energy Research Institute, said “times are tough in the Canadian oilpatch,” despite production growth from about 2.5 million barrels a day in 2011 to almost 4.0 million barrels a day by the end of 2017, mostly from the oilsands.

“While other North American producers have been enjoying the gradual rise in WTI pricing over the past year, Canadian producers have suffered through declining prices for WCS, the Canadian heavy blend crude benchmark — especially over the past few months,” Howard writes in a blog for RBN Energy.

WCS had a pricing discount to WTI of around US$ 10 a barrel until late summer 2017, but it began to grow and eventually crashed in November to around US$ 25 a barrel, coinciding with the Keystone leak.

“Storage and crude- by- rail shipments have served as a cushion of sorts, absorbing shocks like the Keystone outage and the apportionm­ents, but with more production gains expected in 2018- 2019, that cushion seems uncomforta­bly thin and unforgivin­g,” writes Howard, warning the widening differenti­al is not a short-term phenomenon.

Rafi Tahmazian, senior portfolio manager and director at Canoe Financial in Calgary, said railways shouldn’t be blamed for depressing Canadian oil prices because their ability to transport oil is marginal relative to what is required to accommodat­e production that has been under developmen­t for years.

The blame lies with Canadian government’s anti- energy policies that have impeded pipeline constructi­on, he said.

“We have been saying this for years: It’s coming, beware,” Tahmazian said. “And now it’s here. You get what you asked for. Our anti- energy policy has done nothing to move the needle ( on climate change). All it’s done is to transfer the wealth we should have received to other countries.”

 ?? PETER J THOMPSON / FOR NATIONAL POST ?? “We understand crude is only going to be here for a limited period of time,” Canadian Pacific Rail chief executive Keith Creel said. “We are looking for strategic partners with long-term objectives that allows us to have a more stable book of business.”
PETER J THOMPSON / FOR NATIONAL POST “We understand crude is only going to be here for a limited period of time,” Canadian Pacific Rail chief executive Keith Creel said. “We are looking for strategic partners with long-term objectives that allows us to have a more stable book of business.”
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