Widening discounts on Canadian crude take a toll on Alberta's oil producers
Just when you thought things couldn't get any worse, the discounts on Canadian Light and Edmonton Condensate blew out to record highs this week, sending prices plunging back to the lows of early 2016, when West Texas crude (WTI) and Brent were trading closer to US$30 a barrel. Western Canadian Select (WCS) also tumbled to just US$18 a barrel this week, a whopping 70% discount to WTI. Although crude-by-rail volumes are increasing, refineries in the US Midwest are still running at just 75% of capacity, reducing demand for Canadian crude.
Canadian Natural Resources (CNRL) Executive Vice-Chairman Steve Laut is asking the Alberta government to consider putting a cap on production, in light of the abnormally-high differentials. Laut says former Alberta Premier Peter Lougheed curtailed volumes in the 70s and 80s in order to manage the pipeline space and ensure Albertans got a "fair price" for their oil. Alberta's energy ministry says a quota system would be far too complicated to implement. CNRL says it drilled fewer wells in the third quarter, and plans to shut in about 50,000 bbl/day of heavy oil in November and December.
RBC Capital Markets has called on the province to consider a royalty holiday, which would take almost 200,000 bbl/day of crude off the grid and drain over 7 million barrels from storage. That request was also rejected by the province.
Cenovus says it will slow production at its Foster Creek and Christina Lake in-situ facilities due to low prices and lack of take-away capacity. The company says both facilities are operating at reduced volumes, but promises to adjust production if prices recover. CEO Alex Pourbaix calls the current pricing environment a "massive destruction of value."
The Petroleum Services Association of Canada (PSAC) is warning that depressed Canadian oil and gas prices will reduce drilling demand by about 5% in 2019, translating into a $1.8 billion reduction in capital spending. PSAC says 2019 will mark the third year of stalled activity, blaming the sluggishness on lack of pipeline export capacity.