Canadian Oil Crisis Continues As Prices Plunge

Authored by Nick Cunningham via Oilprice.com,

Canadian oil producers are once again suffering from a steep discount for their oil, causing the largest spread between Canadian oil and WTI in years.

Western Canada Select (WCS) recently fell below $40 per barrel, dropping to as low as $38 per barrel on Tuesday. That put it roughly $31 per barrel below WTI, the largest discountsince 2013.

The sharp decline in WCS prices is a reflection of a shortage of pipeline capacity. Much of the talk about pipeline bottlenecks these days focuses on the Permian basin, and the unfolding slowdown in shale drilling, which could curtail U.S. oil production growth. But Canada’s oil industry was contending with an inability to build new pipeline infrastructure long before Texas shale drillers.

However, the problem has grown more acute over the last 12 months. Even as pipeline takeaway capacity hasn’t budged, Canadian oil production continues to rise. Output could jump by around 230,000 barrels per day (bpd) in 2018, followed by another 265,000-bpd increase in 2019, according to the International Energy Agency.

(Click to enlarge)

As more supply comes online, the pipelines are filling up, and there is little relief in sight. Until Enbridge’s Line 3 replacement is completed – targeted for late 2019 – midstream capacity won’t expand. Enbridge recently received a crucial permit from the state of Minnesota, through which the pipeline will traverse, even though state regulators questioned the need for the pipeline. Environmental groups and Native American tribes affected by the pipeline have vowed to mount a resistance to the replacement and construction of the Line 3, echoing the protests of the Dakota Access Pipeline from two years ago.

“They're bringing highly toxic, highly poisonous tar sands oil directly through major watersheds and the last standing reserve of wild rice that the Ojibwe have to harvest,” Bill Paulson, a member of the Ojibwe tribe, told CNN last month. “Our culture is the wild rice and gathering and being out in the woods. If there's a threat to that, then there's a direct threat to the people.”

It is unclear how this will play out, but the opposition could delay the project beyond the expected start date. That means that the discount for WCS will stick around.

And because there is little, if any, empty space on Alberta’s pipelines, not only will the WCS discount linger, but the benchmark could suffer from higher volatility.

“The Western Canadian oil patch is operating on the edge of available takeaway capacity, which makes discounts especially sensitive to shifts in supply (e.g. Syncrude ramping up from its outage), demand (e.g. higher-than-anticipated Midwest refinery maintenance) or marginal transport capacity (e.g. rail capacity spread too thin),” Rory Johnston, a commodity economist at Scotiabank, told Oilprice.com.

In theory, Alberta could build more refining capacity to process Canadian oil rather than scrambling to find pipeline space or selling at a steep discount, but refineries are expensive, and they would not resolve the problem of takeaway capacity.

“The majority of hydrocarbons produced in Western Canada need to be exported--building additional refineries domestically to get around crude oil pipeline bottlenecks would simply shift it to a product pipeline capacity challenge,” Johnston said. “One way or another, those barrels still need to get to end consumers--either by pipeline, rail, barge, or truck.”

Shipping oil by rail to the U.S. Gulf Coast can cost as much as $20 per barrel or more, according to Scotiabank, double the rate for shipping by pipeline. But with the WCS discount as large as it is, the economics could still work out. However, rail companies have been hesitant to invest in new rail capacity for shipping oil, especially if the business opportunity of doing so only lasts for another two or three years. Still, crude-by-rail shipments have climbed significantly this year, hitting a record high 198,788 barrels per day in May, the latest month for which data is available. However, even if rail economics look attractive, the lack of sufficient capacity means that rail won’t be able to entirely bridge the gap.

With midstream capacity stubbornly stuck without a near-term solution, the Canadian government has moved to essentially nationalize the Trans Mountain Expansion project, buying it from Kinder Morgan after the U.S.-based company moved to scrap the expansion plans.

But on that front as well, Ottawa continues to receive bad news, following its desperate bid to take over the project. The Canadian Press reported on August 7 that expanding the project will cost $1.9 billion more than previously thought, and will take a year longer than expected, putting the start date off until late 2021.

Comments

Davidduke2000 Fri, 08/10/2018 - 08:14 Permalink

it smells the us behind all the troubles in the world, but the us is not immune from contagion as once the snow ball start rolling it will crush even the us on its way down.

Adullam bluskyes Fri, 08/10/2018 - 12:09 Permalink

Canada needs to process its raw materials 'in-house' rather than simply being "hewers of wood and drawers of water (and oil)". Exporting raw materials to the US and elsewhere and then buying back the processed product is not a good long term solution to economic survival.

The problem is that there is no consistent 'Canada first', pro-business mindset in their politicians and the vast, resource-rich country is run by southern Ontario interests.

In reply to by bluskyes

CPL King of Ruperts Land Fri, 08/10/2018 - 14:32 Permalink

Actually only one place gets hosed that situation is US investors, there really isn't much invested into Canada by Canadians.  We're pretty much the poorest and highest taxed with the least social services delivered. Even today no one is sure why half a paycheck disappears and nothing seems to change.  However no one seems to bitch as the taxes rise by inflation and usual government boon doggies as the agreed upon process seems to suit everyone just fine.

Its a wide ascertain that Canadian public likes getting an inch at a time instead of the whole foot long. Why change for the sake of convention or sense...cents?  Just the way it be. 

In reply to by King of Ruperts Land

Abbie Normal King of Ruperts Land Fri, 08/10/2018 - 21:34 Permalink

Are Canadians really getting hosed?  Let's do the math properly:

A 42 gallon barrel of oil produces 20 US gallons of gasoline after refining, or 77 liters.  US$40 = CAD$52, so one barrel of WCS should cost C$0.68 per liter of gasoline just in raw material.  Add refining, transport, storage, taxes, mark-up, etc. and all of a sudden C$1.40 per liter seems to be about right.

This simple analysis was not paid for by the oil industry; just by someone that can sense a BS calculation a mile away.

In reply to by King of Ruperts Land

robertocarlos aloha-snackbar Fri, 08/10/2018 - 11:20 Permalink

That is in CDN. Gas here is $4.10 USD a US gallon and that's for Shell gold non ethanol gas. It's $3.50 USD a US gallon for regular gasoline.

Gasoline was dirt cheap last year. Maybe 90 cents a litre, now it's 120 cents a litre for regular.  

At the same time remember that gasoline is a waste by-product of oil and the price of both are not really related.

In reply to by aloha-snackbar

asiya789 Free This Fri, 08/10/2018 - 09:04 Permalink

I q­ui­­­t wo­­­rk­­­­ing m­­­y de­­s­k jo­­­b an­­d n­­o­w,,,I ‘m m­­a­­k­­i­­n­­g $­­9­­7/H­­r w­­o­­r­­k­­i­­n­­g f­­r­­o­­m h­­o­­m­­e b­­y d­­o­­i­­n­­g t­­h­­i­­s s­­i­­m­­p­­l­­e o­­n­­l­­i­­n­­e h­­o­­m­­e j­­o­­b­­z.i e­­a­­r­­n $15 ­­t­­h­­o­­u­­s­­a­­n­­d­­s a m­­o­­n­­t­­h b­­y w­­o­­r­­k­­i­­n­­g o­­n­­l­­i­­n­­e three H­­o­­u­­r p­­a­­r d­­a­­y.i r­­e­­c­­o­­m­­m­­e­­nd­­e­­d y­­o­­u t­­r­­y i­­t.y­­o­­u w­­i­­l­­l l­­o­­s­­e n­­o­­t­­h­­i­­n­­g.j­­u­­s­­t t­­r­­y i­­t o­­u­­t o­­n t­­h­­e f­­o­­l­­l­­o­­w­­i­­n­­g w­­e­­b­­s­­i­­t­­e a­­n­­d e­­a­­r­­n d­­a­­i­­l­­y…g­­­o t­­­o t­­­hi­­­s si­­­te ho­­­me media technical school t­­­a­­­b f­­­or m­­­or­­­e d­­­et­­­a­­­il many thanks
               BeSt Of LuCk 
>>>>>>>> http://www.todaysfox.com

 

In reply to by Free This

Adolfsteinbergovitch asiya789 Fri, 08/10/2018 - 09:24 Permalink

Hi girl, I'm from the IRS and I'm here to help you. I just wanted to recap your income statement. So we have $97 an hour during 3 hours a day and this provides you with $15k per month.

So if my calculations are right you work 51.5 days per month. Do you have slaves? Where are the children? If you lend them to me i promise to shut my mouth up.

In reply to by asiya789

FBaggins Free This Fri, 08/10/2018 - 11:04 Permalink

Lower price means less jobs at the oil patch and less oil sales, but no matter how the barrel price fluctuates the price-fixing oil companies running the gas stations in most of Canada keep the price per litre at higher and higher levels. 

In reply to by Free This

CogitoMan Free This Fri, 08/10/2018 - 12:53 Permalink

I don't get it. I do not know much about oil exploration but I do know that crude oil becomes scarce. We are in the midst of so called "peak oil". Current, unresolvable problems will be quickly solved when price of oil doubles or trebles. Why not wait couple years and get much better price instead of giving it for free now?

In reply to by Free This

Offthebeach CogitoMan Fri, 08/10/2018 - 13:56 Permalink

All oil projects require decades out, complex financing by specialised lenders.  Next boom time you won't get finance, because you waltz around like a fairy, think multi-billion dollar projects, "just happen". You won't have the good workers, engineers, supply companies because they're already hired and working with their long term partners.

When you start, whether you know it, you'll be saying, "Hey, we're desperate to get scatce skilled workers,  desperate to get engineering from maxed out good companies( Oh, and we'll dump you too.  Or not. We're wacky, funny ha ha Canadians! ).  You'll get second and third rate and pay bend over squeal prices.

 

In reply to by CogitoMan

Jaymorpheus SQRT 69 Fri, 08/10/2018 - 10:38 Permalink

In dark times, who will they choose to turn to?  

If they turn ever more to China, #45 will further tighten our economic grip.

AMLO in Mexico> he will break. He knows where his bread is buttered. I think odds are good he sees the light, knows the importance of his northerly neighbor, and will cut a "I will help pay for a wall, and curtail illegal immigration, for freer trade and some military help w/ the busted cartel gangs"

 

Call me whatever, but he strikes me as a bit of a renegade and someone who is willing to trade on economics. 

 

In reply to by SQRT 69

gmak Fri, 08/10/2018 - 08:16 Permalink

Dear Ojibwe:  Your culture lost 500 years ago. To claim to be a rice gatherer in this day is disingenuous at best. Even the Sherpas have dishwashers, don't you? You drive cars and trucks, don't you? So stop about your identity being tied to being in the woods gathering.

 

That ship has sailed. Your culture is part of modern civilization and you should either fully accept that, or just STFU.  I will note that you maintain your 'culture' only with generous (wasted) handouts from the rest of us. How about you have some pride and maintain your culture on your own, right? And give back all those modern toys while you're at it. They're cultural appropriation.

 

Someone who sees peak-PC and SJW in the rear view mirror.

 

p.s. The oil will travel over the land one way or another. Why not look at the incidents of train vs truck vs pipeline disasters and then make a proper decision to take the least risky. (hint: pipeline). And so long as you're using detergents, soaps, shampoos and so forth - and washing your vehicles with water running off - how dare you play the "watershed being poisoned" card. You hypocrites.

inosent gmak Fri, 08/10/2018 - 08:23 Permalink

Indeed. I get the reckless endangerment of the environment part, but these 'indians' are all frauds, wearing clothing designed by the europeans, driving cars they could not conceive, flying in airplanes, enjoying running water, etc etc etc

They wouldn't last very long if they really want to 'live off the land' like they claim - esp in Canada

In reply to by gmak

itstippy gmak Fri, 08/10/2018 - 09:05 Permalink

The Ojibwe aren't alone in setting up regulations to prevent "progress" in their back yard.  Try getting a permit to build high-density housing in the Hamptons or downtown San Francisco.  The wealthy "natives" would scream bloody murder that you're destroying the ambience of the place.

The locals in my rural Wisconsin township got together and adopted a "Land Use Plan" fifteen years ago that requires minimum 30 acres for building a new residence.  We were being invaded by wealthy big city refugees who would purchase a one acre hilltop wood lot with an easement to the road and build a 4,000 sq. ft. Martha Stewart Country Living McMansion on it.  The local farmers and landowners agreed to band together and put an end to the madness.  We are conservative people who do not like being told what we can and can't do with our own land, but we could see where things were headed.  Our township was in danger of becoming something we didn't want.

In reply to by gmak

bh2 Fri, 08/10/2018 - 08:18 Permalink

To allay concerns of native people, why not build a double-wall pipeline through their lands to assure any leak would be taken off before it hits the ground?