Canadian Oil Patch Plunged into Crisis

Canadian Oil Patch Plunged into Crisis
While the U.S. oil industry has hit a speed bump with the recent drop in oil prices, producers in Canada are in a full-blown crisis.

(Bloomberg) -- While the U.S. oil industry has hit a speed bump with the recent $20 drop in oil prices in New York, producers in Canada are in a full-blown crisis.

Heavy Canadian crude has been on a downward spiral since mid-May, with prices plummeting by more than 60 percent as an onslaught of new production from the oil-sands overwhelms the nation’s pipelines. In the past two months, the decline accelerated as many of the U.S. refineries that processed all that oil shut down for maintenance.

The result is the worst pricing environment in the Canadian oil industry’s history and a disaster for a sector that accounts for about a 10th of the nation’s economy and a fifth of its exports. The crisis is threatening oil producers’ profits, causing deep divisions within the industry and putting pressure on Justin Trudeau’s government to act.

Adding to the gloom is the relatively positive outlook for the U.S. energy industry is enjoying.

“In my 36 years in this business, I have never seen such a wide differential in sentiment between Canada and the U.S.,” Kevin Neveu, chief executive officer of oilfield-service company Precision Drilling Corp., said in an interview in Calgary. “I’ve never seen more frustration among our customers and our competitors and in our peer-group companies than right now.”

Western Canada Select crude -- the main blend sold by the nation’s prolific oil sands -- closed at $13.46 a barrel on Thursday, the lowest in Bloomberg data stretching back to 2008. The blend’s discount to U.S. benchmark crude exploded to as much as $52.40 a barrel last month, also a record.

While the price has recovered somewhat in recent weeks as some U.S. refining capacity has come back online, the crisis is far from over. The nation is still producing more oil than its pipelines can handle and its storage capacity is filled to the brim.

That has prompted some Canadian producers to take extraordinary steps, like shutting down some of their production, striking deals to ship oil via costlier rail and even asking Alberta Premier Rachel Notley, head of the country’s top oil-producing province, to mandate output cuts until the glut of oil is cleared.

That idea has caused a rift in the industry, pitting mostly pure producers like Canadian Natural Resources Ltd., Cenovus Energy Inc. and MEG Energy Corp., who have been hammered by the low prices, against the large, integrated oil companies like Suncor Energy Inc. and Husky Energy Inc., who have their own refining capacity and are mostly unscathed by the situation.

The split has put Notley, a center-left politician in a traditionally conservative province, in a bind. While she has yet to take a position on whether to mandate production cuts, she has hinted the possibility isn’t off the table.

Meanwhile, she has appointed three special envoys to come up with short-term solutions for the crisis, accelerated efforts to build new refining and upgrading capacity in the province, pressed Trudeau’s government for help in ramping up the nation’s capacity to ship oil by rail and pushed it to speed construction of the Trans Mountain pipeline expansion, one of the major projects that could alleviate the nation’s pipeline bottlenecks.

Economic Impact

But it’s not just Alberta’s government that’s being hit by the crisis. The situation poses challenges for Canada more broadly, with estimates that the wider discount on local crude is costing the country C$80 million ($60 million) to C$100 million a day. That is already sapping growth forecasts nationally, raising pressure on Trudeau to come to the rescue.

Trudeau has no silver bullets, though. His government already bought a beleaguered oil pipeline expansion project this year in a bid to save it, only to be dealt a fresh delay by a court ruling. He has tried to push through pipelines as well as tougher environmental measures, such as a carbon tax, as a package deal. Now the crisis in the oil patch threatens support for his environmental efforts that were supposed to go hand-in-hand and is keeping the pressure on him to find quick fixes for a problem that has built up over years.

“The market as we see it today is broken and dysfunctional,” Canadian Natural Vice Chairman Steve Laut, urging a temporary cut in production to boost prices, said in an interview with BNN Bloomberg Television. “So there’s a role for the government to play to bring order back to the market.”


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WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Yarbles  |  November 23, 2018
Canadians deserve it.
Jack  |  November 23, 2018
what is really crazy about all this is the pressure to ship our discounted oil to the USA on CNR which is no longer Canadian National Railways...It is as i am told now owned or operated by Illinois Central. So not only are we giving our oil away dirt cheap to the USA, but we are paying them to ship it to themselves on their railway. Gee, i wonder why pipelines dont get approved...my god.
Bishwanath Ghosh  |  November 23, 2018
I believe the best alternative for Canada is to develop own refining facility in the country and export the gasoline and other product instead of depending on the export of crude mainly to or through US. The initial investment may be very high to design special refining system for the heavy crude; however in long run it will pay off and the pressure from US or other buyers can be avoided. The discount challenge is an issue that Canada is facing since long. Additionally, the by products (bitumen, petro-coke etc) of heavy crude through refining is also in high demand, especially in developing country.
Bob  |  November 23, 2018
Why are Canadians getting less than $20 a barrel for their oil yet still paying world prices at the fuel pumps
N Patrick  |  November 22, 2018
Doe this remind anyone else of Venezuela ? Good Bye Canada
Aaron  |  November 21, 2018
Canada, we now need to rapidly build our Plan B: transition to 100% renewables. We are already 60% renewably hydro powered and wind and solar are now the cheapest and fastest sources of new electricity. Let's ramp up high insulation, high efficiency, electric heating and electric industrial transportation. Tesla already has 500 orders for their electric 300 - 500 mile semi trucks. Tesla's 100 MW Powerpack battery wind farm in Australia has cleaned and stabilized their grid. New industrial jobs, new industrial businesses in ever region of Canada!
Greg Novik  |  November 21, 2018
Notley and Trudeau are the authors of this misfortune!! Pressure is mounting, people are starving and the politicians are in hiding


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