Oil sands producers are facing renewed cost weakness even as the business basks in the afterglow of a significant pipeline approval.
TransCanada Corp.’s proposed Keystone XL cleared a huge hurdle this week following Nebraska regulators narrowly approved the $8-billion (U.S.) project, bringing the industry one step closer to forging a long-sought connection with refineries on the U.S. Gulf Coast.
But the great news for hard-hit Alberta manufacturers has been largely overshadowed with competitions vowing to appeal the decision and costs for petroleum sands-derived crude sinking to new lows.
Costs for Western Canadian Select (WCS), a combination of heavy crude and bitumen from the oil sands, have been hit by an outage on TransCanada’s unique Keystone line, an integral artery which carries about 590,000 barrels per day of oil from Hardisty, Alta., to markets in the U.S. Midwest.
The line was closed last week after a 5,000-barrel spill in South Dakota, and the company hasn’t indicated when it will restart. Adding to stress, Enbridge Inc. has also rationed distance on its Line 67 heavy-oil conduit for the month of December.
A commerce industry source said the move was because of combination of high demand and upkeep at stake, but analysts also see such constraints as a harbinger of future limitations.
This year, WCS has traded in a narrow band to U.S. primitive, signalling there is enough space to maneuver barrels on existing pipelines, said Judith Dwarkin, chief economist in RS Energy Group in Calgary. That could change as increasing oil sands production tests the limits of current export capability.
“In the longer term, there’ll be a demand for new incremental pipeline capacity to accommodate the growth that is expected,” she said by telephone. “There is no question.”
WCS barrels for January delivery on Tuesday fetched about $16.10 less than U.S. benchmark West Texas intermediate petroleum, agent Net Energy Inc. said, contrary to a reduction of around $14.20 final week.
U.S. crude settled Tuesday at $56.83 a barrel, implying a value of approximately $52.07 (Canadian) for the heavy oil, depending on the current exchange rate.
Canadian heavy crude trades at a discount to the headline North American cost since it requires more processing and refining equipment to turn it into transport fuels like gasoline and diesel.
The purchase price gap, called the differential, varies for an assortment of reasons which also include supply gluts or disruptions to general need. In 2013, by way of instance, the spread mushroomed to over $40 (U.S.) per barrel.
Producers have invested heavily in terminals to ship manufacturing by train, making such heavy discounts unlikely now. However, a number of the current weakness is more structural, driven by fast-rising output and upkeep finishing at existing plants, ” said Mark Oberstoetter in consultancy Wood Mackenzie.
Suncor Energy Inc., Canadian Natural Resources Ltd. and many others have sunk billions of dollars into expansions throughout the recession, with much of the spending dedicated before crude prices crashed.
Those barrels are poised to strike a marketplace that’s increasingly swollen with supplies, effectively making the business more vulnerable to abrupt pipeline or refinery outages, Mr. Oberstoetter stated. Meanwhile, the fate of jobs like Keystone XL remain unclear.
TransCanada has said it is studying the Nebraska approval, which okayed an alternative to the business’s preferred route through the nation. Opponents have vowed to fight the 830,000-barrel-a-day project, raising the spectre of further delays and costs.
Rival Kinder Morgan Canada Ltd.’s proposed Trans Mountain expansion through British Columbia has already been pushed back by at least nine months, meaning primitive will not flow until late 2020 at the earliest.
“You are finally seeing that looming scenario we have been talking about, where distribution is filling up that pipeline capacity,” Mr. Oberstoetter stated.
“Any disruptions to the pipeline system will surely drive a spike to [the WCS differential], given it is more sensitive and there is less leeway.”