The pipelines carrying Canadian heavy crude to the U.S. are running at capacity and soon, more oil will have to start being transported by railway as oil sands operators ramp up production. The bad news for these producers is that railway transportation of crude is costlier than pipelines, and they will have to increase the discount at which they sell their oil.
Canadian oil exports to its southern neighbor have exceeded 3 million bpd for the last six weeks, except for one, when the average daily dipped to 2.95 million barrels. At the same time, pipeline projects, both local and cross-border, have stumbled on vigorous opposition from environmentalists and native communities.
Keystone XL, which should have run from Alberta to the Gulf Coast refineries, was shelved last year after a wide-scale environmental campaign. Another TransCanada pipeline project – Energy East – which should have shipped crude to the Atlantic coast is being reviewed amid protests that, earlier this month, put a premature end to the hearings about the project at the national Energy Board. These are just a couple of examples that paint a disheartening picture of the tight corner that Alberta oil sands producers have found themselves in. They also highlight the excessive dependence of Canadian E&P’s on the U.S. market.
Conventional oil production in Canada is declining and the biggest hopes for the revival of the country’s embattled energy industry are pinned on the oil sands. But Alberta is landlocked, so the heavy crude extracted there needs either pipelines to reach a coast or the U.S. refineries, or railways. This is where oil producers in the oil sands province find themselves between a rock and a hard place.
Western Canada Select already sells at s discount of some $14.30 a barrel to West Texas Intermediate, according to Bloomberg data. This discount could reach $16 a barrel before the year’s end, according to one analyst from ARB Midstream, a company specializing in oil transport investments. This discount could interfere with E&Ps attempts to get back on their feet after the wildfires from May that took out about a million bpd in Alberta, especially given that oil prices are still subdued and likely to remain so in the foreseeable future.
Meanwhile, over $40 billion in fresh investment is seen to be splashed on oil sands development through 2026. Local producers appear to be determined to expand production but in light of the news about pipelines overflowing with crude, the question about where this production will go and at what price, remains open.
The oil industry of Canada is in dire need of government support, it seems. Support that will somehow juggle the government’s environmental commitments and the environmental lobby with the interests of the oil industry. It’s a tough gig for PM Trudeau’s cabinet, as Oilprice wrote earlier this month and the country’s midstream majors don’t seem to be buying it. Some of them are betting on acquisitions in the U.S. to ensure profitability, such as it is. Others – Cenovus and Canadian Natural Resources – have announced they will add pipeline capacity of 390,000 bpd by the end of 2017, which is some light at the end of the tunnel. Still, the problem with Canada oil industry’s overdependence on the U.S. market remains and will remain until the industry and the environmentalist lobby find a mutually beneficial solution.