Around the world oil prices are on the rise, except in Alberta where a barrel is worth less than half of what it would fetch in the United States.
Global prices are climbing as some key, oil-producing countries are in trouble — whether it’s Iran facing new sanctions or Venezuela creeping closer to an economic implosion. Even in the United States, oil production growth is showing signs of a slow down.
That’s why prices are spiking just about everywhere.
The Brent oil price, considered the global benchmark, has surged above $85 US per barrel. In the U.S., West Texas Intermediate cruised past $75 US. But in Alberta, Western Canada Select is stuck at $35 US per barrel.
The divide between WCS and WTI has never been larger, according to Martin King, commodities analyst with Calgary’s GMP FirstEnergy. The steep discount in Canadian oil prices compared to American prices could cost Alberta oil producers billions this year in foregone revenues.
The main problem is a backlog of oil in Alberta. Here are the three reasons why that’s happened.
As the summer driving season began to wind down, some U.S.-based refineries shutdown for maintenance. That was an unpleasant surprise for Canadian oil companies in August and September because those refineries process heavy oil from Alberta. One of the refineries still shutdown is BP Plc’s Whiting operation in Indiana, which is the single largest consumer of Canadian heavy crude in the U.S.
The outages are a short-term problem, but nonetheless are causing a significant drop in demand for Alberta’s oil.
Oilsands production continues to climb as project’s like Suncor’s Fort Hills facility ramp up to full activity. The problem is all that supply is “bumping into a dearth of pipeline capacity available to take it to market,” according to Judith Dwarkin, chief economist with the RS Energy Group.
Export pipelines out of Alberta continue to run near full capacity, and some companies are struggling to export their oil.
Recent delays to construction of the Trans Mountain expansion project “is not the end of the world,” according to King, since Enbridge’s Line 3 replacement project should be up and running at the end of next year.
After pipelines, the second choice is shipping by rail, which has grown substantially in recent months, reaching record highs. As more and more companies sign deals with railways, volumes are anticipated to rise further. Experts say that should help alleviate the backlog of oil and narrow the gap between Canadian and American oil prices.
“The economics say you can do it and still make lots of money given where the spreads are right now,” said King.
New marine fuel standards
A much less talked about factor that’s weighing on oil prices in Alberta is a new fuel standard for the marine shipping industry. The International Maritime Organization will have a sulfur limit rule in place for 2020, which is known as IMO 2020.
The policy generally will target heavy sour crudes like those produced in Alberta in favour of low-sulphur sweet oil. Some shipping companies have said they will install scrubbers in the exhaust stacks of their vessels instead of purchasing lower sulphur fuels. Some experts also say refineries in North America are sophisticated enough to reduce the sulphur content when they process Canadian heavy oil.
Regardless, the sulphur restrictions are still weighing on future prices of heavy oils around the world because the potential impact is unknown.
Add up these three issues and there’s no quick fix for the oilpatch.
The backlog of oil is expected to take several months to clear once U.S. refineries finish their maintenance work and begin processing again. The export issue should improve in about 12 months after more pipeline capacity is added and crude-by-rail shipments climb.
The new sulphur rules, however, are a new potential problem for an industry that doesn’t need one.
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Sherwood Park is a large hamlet in Alberta, Canada within Strathcona County that is recognized as an urban service area. It is located adjacent to the City of Edmonton’s eastern boundary, generally south of Highway 16 (Yellowhead Trail), west of Highway 21 and north of Highway 630 (Wye Road). Other portions of Sherwood Park extend beyond Yellowhead Trail and Wye Road, while Anthony Henday Drive (Highway 216) separates Refinery Row to the west from the balance of the hamlet to the east.
Sherwood Park was established in 1955 on farmland of the Smeltzer family, east of Edmonton. With a population of 70,618 in 2016, Sherwood Park has enough people to be Alberta’s seventh largest city, but technically retains the status of a hamlet. The Government of Alberta recognizes the Sherwood Park Urban Service Area as equivalent to a city.
Sherwood Park, originally named Campbelltown, was founded by John Hook Campbell and John Mitchell in 1953 when the Municipal District of Strathcona No. 83 approved their proposed development of a bedroom community east of Edmonton. The first homes within the community were marketed to the public in 1955. Canada Post intervened on the name of Campbelltown due to the existence of several other communities in Canada within the same name, so the community’s name was changed to Sherwood Park in 1956.
The Sherwood Park Urban Service Area is located in the Edmonton Capital Region along the western edge of central Strathcona County adjacent to the City of Edmonton. The majority of the community is bound by Highway 16 (Yellowhead Highway) to the north, Highway 21 to the east, Highway 630 (Wye Road) to the south, and Anthony Henday Drive (Highway 216) to the west. The Refinery Row portion of Sherwood Park is located across Anthony Henday Drive to the west, between Sherwood Park Freeway and Highway 16. Numerous developments fronting the south side of Wye Road, including Wye Gardens, Wye Crossing, Salisbury Village and the Estates of Sherwood Park, are also within the community. Lands north of Highway 16 and south of Township Road 534/Oldman Creek between Range Road 232 (Sherwood Drive) to the west and Highway 21 to the east are also within the Sherwood Park urban service area.