Bargain price oil: How long will it last?

As oil from Alberta and Saskatchewan continues to sell at record discounts, American refineries are enjoying lucrative profit margins at the expense of Canadian oil producers.

The sharp drop in oil prices began in late September and is expected to continue for roughly another month.

The culprit is limited export pipeline space and refinery maintenance outages in the U.S. Midwest. Until those refineries are back up and running, oil prices in Western Canada will languish and so, too, will company revenues and government royalties. 

It’s like you’re walking down the stairs blindfolded — you don’t really know exactly when you’re going to get to the end of it. And that’s kind of what volatility is like when prices are low like this.– Samir  Kayande , RS Energy Group

The refineries, including BP’s Whiting, Phillips’ Wood River, and Marathon’s Detroit facility, each consume large volumes of Canadian heavy oil. That’s why the impact on prices has been substantial.

Zachary Rogers, a Houston-based refining analyst with Wood Mackenize, said much of the refinery capacity should be back online soon — if the maintenance work follows typical timelines.

“There is some conflicting data in that realm,” Rogers said. 

“However, if you look at this from a historical trends perspective and usual time it takes for refineries to turn around their units, it’s likely the majority of that refining capacity in the Midwest will be back online within the next few weeks.”

The difference between heavy oil prices in Alberta and benchmark prices in the U.S. is about $50 US per barrel. That figure, comparing Western Canada Select (WCS) and West Texas Intermediate (WTI), is expected to narrow by mid-November as shutdown refineries begin processing oil again.

While many Canadian oil companies “can’t seem to catch a break,” said Rogers, many American refineries are enjoying a “substantial margin uplift.”

“For certain refineries, it’s certainly quite the heyday, if you will, if you’re actually online at the moment,” he said.

Not only are heavy oil prices selling at a heavy discount, but light oil in Alberta has also taken a hit as pipeline and rail transportation space is limited.

The Western Canadian oil industry is losing at least $100 million every day and that’s a conservative estimate, according to GMP FirstEnergy analyst Michael Dunn.

Some Canadian companies also own refineries in North America and have secured pipeline space to other markets, which is helping to offset the oil price shock.

Oil backlog building

Samir Kayande, an analyst with RS Energy Group, said the fundamental, structural issue behind the gulf in prices is a tight transportation market that affects more than just Alberta.

“Oil that’s produced in Western Canada and North Dakota has limited opportunities to get onto a pipeline in order to get it to market,” said Kayande.

“We get kind of stuck sometimes looking at just Western Canadian production. But, in fact, there’s a resurgence in production volumes in North Dakota as well and that may be starting to impact the system a little bit.”

Oil production keeps rising in Alberta, driven largely by oilsands development. (Kyle Bakx/CBC)

Combined with maintenance on a number of refineries, Alberta oil needs to go into storage, which is already quite full, Kayande said.

“And in that kind of scenario, where there’s not a temporary place to put oil for a short period of time, that’s when prices can move a lot,” he said.

Railways will start moving more oil in the next few months, but he said what’s really needed is more transportation capacity, like the completion of Enbridge’s Line 3 pipeline project.

But Line 3 isn’t expected to be up and running until late 2019.

In the meantime, expect the volatility to continue.

“It’s like you’re walking down the stairs blindfolded — you don’t really know exactly when you’re going to get to the end of it. And that’s kind of what volatility is like when prices are low like this,” Kayande said.

“You have very small changes at the margin that send prices moving both up and down by big dollar amounts. And we’ve seen a lot of that this year.”

Alberta royalty hit

Kent Fellows, an energy economist at the University of Calgary’s School of Public Policy, said the discount on WCS could have a significant impact on provincial royalties if it goes on too long.

The impact on corporate revenues in the oilpatch also affects the federal government in terms of taxes.

“Over the longer term, an increase in WTI should be good news, but it’s not as good news as we would like if we had better pipeline transportation,” Fellows said.

Mike Brown, a spokesman for Alberta Finance Minister Joe Ceci, wouldn’t speculate on the impact of the differential on provincial coffers ahead of the government’s fiscal update next month.

“The differential is just one of a number of factors taken into account when making a budget,” he said in an email to CBC News last week.

According to the government, Alberta produces just over 3.5 million barrels per day of crude oil — about half of that is heavy, diluted bitumen and the other half is light crude oil.

Inside the province, there are four refineries that process roughly 450,000 barrels per day (bpd) of crude — both light and heavy. The remaining three million bpd is exported out of Alberta: roughly two-thirds is heavy, one-third is light.

Last month, when the gap between WCS and WTI was around $35, Saskatchewan Premier Scott Moe said the increasing price differential could cost the provincial government about $300 million per year instead of the $210 million they initially expected. 

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Sherwood Park

Sherwood Park is a large hamlet in Alberta, Canada within Strathcona County that is recognized as an urban service area.[7] It is located adjacent to the City of Edmonton’s eastern boundary,[8] generally south of Highway 16 (Yellowhead Trail), west of Highway 21 and north of Highway 630 (Wye Road).[9] 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.[9]

Sherwood Park was established in 1955 on farmland of the Smeltzer family, east of Edmonton. With a population of 70,618 in 2016,[6] 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.[8] 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.

Originally posted 2018-10-18 02:24:55. Republished by Blog Post Promoter

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