Oil sands crude is available, again.
Heavy crude prices turned sharply lower this week as constraints on key export pipelines force surging manufacturing into storage, dealing a blow to government finances and company revenues.
Western Canadian pick (WCS), a combination of traditional heavy crude and bitumen from the oil sands, has been under pressure from reduced flows on TransCanada Corp.’s Keystone pipeline and distance rationing on Enbridge Inc.’s mainline system, which collectively move most Canadian crude to U.S. markets.
The restrictions come as Suncor Energy Inc.’s $17-billion Fort Hills mine and other expansions equipment up, pushing the reduction on Canadian heavy crude to more than double levels seen earlier this season.
On Wednesday, WCS barrels for delivery in January changed hands for $29.75 (U.S.), a reduction of $26.85 from U.S. benchmark West Texas intermediate, agent Net Energy Inc. said. Some lightly traded December volumes brought $33 under WTI.
“Certainly a great majority of that is connected to Keystone and a few of the increase you are beginning to see at Fort Hills too,” explained GMP FirstEnergy analyst Martin King at Calgary.
Crude had already backed up in Alberta following a 5,000-barrel spill in South Dakota shut the Keystone pipeline for 2 weeks last month. The 590,000-barrel-a-day pipeline has declared at reduced prices, but the company hasn’t said when it would return to normal service.
Exports were crimped after Enbridge said it would ration area for December on its own Alberta-to-Wisconsin Line 67 pipeline, adding to heavy restrictions already in place. The line includes 450,000 barrels per day (b/d).
Such constraints are regarded as temporary, but they also point to significant headwinds for Alberta producers as well as the provincial government, which is based on electricity royalties to finance a huge chunk of its funding.
“Canadian crudes have become the perfect storm with issues plaguing several big pipelines,” said Michael Tran, an energy strategist at Royal Bank of Canada.
“This underscores the structural issues surrounding lack of takeaway capacity.”
Oil sands crude trades at a discount because it has to be sent over long distances to refineries and since it requires more processing to become gasoline and diesel.
In 2013, the cost gap, called the differential, ballooned to $40 a barrel, prompting then-Alberta premier Alison Redford to warn of a $6-billion (Canadian) gap at the provincial budget.
Few are predicting a repeat situation, but increasing production is once again testing the limits of available pipeline distance, forcing manufacturers to pay more to send surplus barrels by train.
Alberta Premier Rachel Notley on Wednesday reported the price weakness indicates the industry desperately needs more export routes, such as Kinder Morgan Canada Ltd.’s proposed Trans Mountain expansion into the West Coast.
“It highlights and underlines why we will need to get moving on the pipeline,” she told The Globe and Mail.
Enbridge sees its mainline system, which includes 2.85 million b/d, remaining full as 850,000 barrels per day of new supply comes online through 2022, a top executive said this week.
Expansions include Suncor’s Fort Hills mine, which is expected to make 20,000 to 40,000 b/d from the first quarter of next year, figures that could rise from there over time.
These barrels are hitting a market awash in crude. Entire western Canadian crude held in storage rose 900,000 barrels last week from a week before to approximately 32 million barrels, based on data company Genscape Inc.. One year ago, stocks were approximately 28 million barrels.
“People are only scrambling right now to try to find rail to place it on, but there is not enough rail now to absorb the effects of just how much supply is coming through,” analyst Mike Walls said.
With a report from Kelly Cryderman in Calgary