CALGARY – Canadian heavy crude oil prices fell sharply this week as oil supplies surge, inventories rise and railway shipments are unable to keep pace with rising production.
- Canadian Oil Patch Technology Guidebook And Directory Assistance Program
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The article also mentions that the federal government will make more than a billion dollars available to oil producers as assistance in buying modern technology. This article indicates the federal money will not be available for the rail car, locomotive, or capacity improvements.
The value of multiple blends of Canadian oil fell sharply relative to the U.S. benchmark price West Texas Intermediate, including light oil blends at the Edmonton hub.
Data from AltaCorp Capital shows the discount for Western Canada Select, a heavy blend, rose above US$27 per barrel, marking the widest discount for Canadian heavy crude since July. WTI crude futures settled down 2 cents at US$67.75 per barrel Friday, compared to the WCS’s US$40.59 per barrel.
In addition, the investment bank’s data shows that light oil blend Edmonton Par is now trading at a US$16.16 discount per barrel to WTI, — the steepest discount for that blend since 2014.
The restart of the Syncrude oilsands project is the most “obvious” reason for the drop in Canadian oil prices, but it’s not the only cause, Auspice Capital Partners founder Tim Pickering.
Syncrude, which has production capacity of 350,000 barrels of oil per day, completely shutdown in late June following an unexpected power outage, and has been slow to come back online as the joint-venture project’s biggest owners — Suncor Energy Inc. and Imperial Oil Ltd. — repair the facility.
The last of Syncrude’s three cokers, a component of the project’s bitumen upgrader, is “ready to come back online now,” Suncor president and CEO Steve Williams said at an investor conference on Wednesday.
Williams also said the company has been steadily ramping up production from its 194,000-bpd Fort Hills oilsands project over the course of the year.
As oilsands production from the two projects are either coming back online or coming into the market for the first time, inventory levels in the Canadian market and U.S. market have been rising.
Western Canadian oil inventories rose 4.3 million barrels to a record high of 36.3 million barrels the week ended Aug. 31, according to research firm Genscape.
In the U.S., inventories of crude oil, gasoline and distillates rose by 700,000 barrels this week at a time when analysts expected a draw of 3.7 million barrels, Raymond James analyst Chris Cox wrote in a Thursday research note.
The widening differential has been particularly frustrating to domestic oil companies at a time when the sector is digesting last week’s court setback and delay for the Trans Mountain pipeline expansion to the West Coast.
National Energy Board data shows oil-by-rail shipments from Canada rose to over 200,000 barrels per day in July – a fresh all-time-high — but a level that is still short of what’s needed to clear out the glut of oil in Western Canada, Auspice’s Pickering said.
“When you put everything together — between Syncrude, Suncor’s comments, inventory levels that came out this week and they’re swelling and no more meaningful rail pickup — it puts us in this situation,” Pickering said of the rising Canadian oil discounts.
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Canadian oil production is expected to reach 4.7 million bpd by the end of 2018, compared to 4.5 million bpd at the end of last year, according to a National Energy Board forecast.
“It just keeps happening in this market place where you’re expecting a good thing to happen at some date that we have in our calendars, and then as we get closer there’s one (problem) after another,” Pickering said.
With files from Bloomberg
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Mandatory production cuts have narrowed the oil differential, but without a long-term solution the price discount could once again spiral out of control, say industry experts.
“Without market access, I can’t see how we wouldn’t get back into a similar situation six months after curtailment,” said Tristan Goodman, president of the Explorers and Producers Association of Canada.
He said producers have passed the point of frustration.
“The mood unfortunately is still one of anger,” he said in an interview Tuesday. “I can appreciate why. We have a very positive contribution to make here, not only to the Canadian national economy but I would argue globally.”
Province releases list of 28 companies
Premier Rachel Notley announced in December that Alberta would cut production by 8.7 per cent until 35 million barrels in storage were cleared out.
Notley’s curtailment plan aimed to address the price gap between Western Canadian Select and West Texas Intermediate. The discount peaked at around US$40 in mid-November.
The province released a list to Postmedia of the 28 companies that were directed to slash production by a combined total of 325,000 barrels per day (bpd). While most of the companies are known to industry insiders, it’s the first time the province has released a comprehensive list to media.
“Due to the commercial sensitivity of the information, we cannot provide the figures broken down by each company,” said ministry of energy spokesman Mike McKinnon in a statement.
Since the curtailment order came into effect Jan. 1, the differential shrunk to less than US$10 per barrel, though analysts suggest the gap will widen again in the coming months.
“While we’ve seen the improvement in the differential, it’s not necessarily reflective of the fundamentals in the market,” said Ben Brunnen, vice-president of oilsands operations and fiscal policy for the Canadian Association of Petroleum Producers (CAPP). “It’s still going to be an uncertain environment for the next month or so.
“What we’ve seen is a reaction from the market to the announcement more than anything,” he added.
‘It is volatile’
Notley has repeatedly said that production cuts aren’t a long-term solution and Alberta needs market access for its resources.
“In the short-term I think it’s good that we’ve been able to drive the price up a little bit, but we also know we can’t count on that,” she told reporters in Calgary Tuesday. “It is volatile.”
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In December, the province estimated producers were making 190,000 raw crude oil and bitumen bpd more than could be shipped out of Alberta. After dealing with excess storage, the province planned to reduce curtailment to 95,000 bpd from the current 325,000 bpd.
Notley said the government still hopes to “take the foot off the gas” after winter production months.
“We’re still getting assessment of storage levels,” she said. “We know that this is not a long-term solution.”
‘When do we exit?’
Goodman said some producers also have outstanding questions about the curtailment process.
“There have been anomalies that haven’t really made a lot of sense … to be fair, the department of energy has been very responsive,” he said. “This is a tough thing to implement.
“This has worked … but when do we get out of this and what happens when we do exit?”
Brunnen said the industry still hasn’t reached consensus about the approach to curtailment, which he described as a last resort.
He said the provincial and federal governments risk damage to the investment climate in Alberta without a long-term solution.
“The industry is in one of the most challenging environments it has ever been in,” he said.
Companies directed to curtail production
ARC Resources Ltd.
Athabasca Oil Corporation
Baytex Energy Ltd.
Canadian Natural Resources Limited
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Canadian Natural Upgrading Limited
Cardinal Energy Ltd.
Canadian Oil Patch Technology Guidebook And Directory Assistance Center
Cenovus Energy Inc.
Connacher Oil and Gas Limited
ConocoPhillips Canada Resources Corp.
Devon Canada Corporation
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Fort Hills Energy Corporation
Harvest Operations Corp.
Husky Oil Operations Limited
Imperial Oil Resources Limited
Japan Canada Oil Sands Limited
MEG Energy Corp.
Nexen Energy ULC
Obsidian Energy Ltd. Tactical intervention the game.
Osum Production Corp.
Pengrowth Energy Corporation
Suncor Energy Inc.
Surge Energy Inc.
Syncrude Canada Ltd.
Tamarack Acquisition Corp.
Torxen Energy Ltd.
Vesta Energy Ltd.
West Lake Energy Corp.
Whitecap Resources Inc.