By August 21, 2017 Read More →

Oil sands demand up and supply set to rise in coming months

Oil sands

Oil sands companies like MEG Energy are enjoying higher prices as US producers look to the massive Canadian resource to replace Venezuelan crude supply interrupted by unrest and OPEC production cuts continue.  MEG Energy photo.

Oil sands producers grapple with lack of pipeline capacity as production rises

The second quarter of 2017 saw oil sands producers Cenovus and MEG Energy boost their gains on higher prices for Western Canadian Select crude, but these gains are not expected to last.

According to Reuters, most oil sands companies are expected to book losses or post sharp drops in profit in the coming quarters as some projects currently under construction come online, boosting production. As well, costs are expected to rise due to a lack of pipeline capacity and companies are forced to ship crude by rail.

Trans Mountain ExpansionIn recent months as Venezuela struggled with political unrest and OPEC cut production of heavy crude, demand for bitumen from the Alberta oil sands has surged as US refiners seek out alternatives.

As demand rose, so did prices.  Western Canadian Select (WCS), the benchmark for heavy crude is currently trading at a discount of only $9.90/barrel to WTI, compared to a historical difference of around $15/barrel.

In response, companies have boosted their production. Cenovus boosted its production by 65 per cent the the second quarter while MEG Energy hit the upper end of its forecast.

The heady days for Alberta oil sands operations may be short-lived, however, as a number of new projects, including Suncor Energy’s Fort Hills project and Canadian Natural Resources’ Horizon Phase 3, come online this year and put pressure on oil prices.

“Just those two projects are going to (add) over 200,000 barrels (per day),” Stephen Kallir, a Canadian energy analyst with research firm Wood Mackenzie told Reuters.

Kallir says he expects the WTI-WCS spread to return to historical levels in 2018.

Along with the political and social situation in Venezuela, the OPEC supply cut has been a major factor in the oil sands recent successes, but producers are concerned that should OPEC members return to normal production, WCS prices will fall.

“As long as there is OPEC action targeting reducing heavy and medium sour crude to the Gulf Coast, that would be supportive of the price differential, but we have no control of what the OPEC does,” Mark Sadeghian, a senior director at Fitch Ratings told Reuters.

The lack of pipeline capacity will mean companies will have to find other ways to get their product to market.

The hotly contested Kinder Morgan Trans Mountain pipeline and TransCanada’s Keystone XL pipeline could alleviate some pipeline pressures. But with pressure from environmentalists, First Nations and some politicians, the pipeline companies are struggling to even begin construction.

“Until we see things like Trans Mountain go ahead, there is really not a lot these producers can do to try and mitigate those structural headwinds,” Raymond James analyst Christopher Cox said.

AER

 

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