Western Canadian Select Explained
There are dozens of different crude oil streams produced in Western Canada, each with varying degrees of quality and grade. These streams vary from light sweet oil derived from both conventional and non-conventional deposits, to heavy sour blends produced primarily from oil sands in-situ facilities.
Operators market their specific blend of crude to individual customers, usually refineries or commodity trading houses, at set prices. Each marketable stream of crude has a unique specification, primarily defined by its density, viscosity and sulphur content. Every marketable crude therefore requires its own separate storage facility and pipeline access. This creates a marketing and distribution nightmare in Western Canada, where multiple crude streams are produced at varying degrees of quality.
In order to address these challenges, four heavy oil producers (Suncor, Cenovus, Canadian Natural Resources and the former Talisman Energy) came together in 2004 and developed a Western Canadian Select (WCS) blend.
WCS has become one of the largest heavy oil benchmarks in North America produced exclusively in Western Canada. Canadian Natural Resources is the largest contributor of heavy crude to WCS, estimated at 44% (Q1/2017 figures).
ANATOMY OF WESTERN CANADIAN SELECT
Western Canadian Select is comprised of:
20 heavy conventional oil streams produced in Western Canada
non-upgraded bitumen produced from the Alberta oil sands
upgraded bitumen, often referred to as light synthetic crude oil (SCO) and
diluent or condensate, which is added to meet pipeline viscosity requirements.
The various streams are blended at a storage terminal in Hardisty, Alberta to the following specifications:
API density: 20.5 to 21.5°
Sulphur content: 3.0 to 3.5% w/w
Density: 925 to 935 kg/m³
The Hardisty terminal is located 200 km SE of Edmonton. WCS blending, storage and distribution is managed by Husky Energy.
WCS: A DILBIT STREAM
There are three types of crude produced from the oil sands:
Synthetic Crude: Produced by upgrading bitumen, primarily from mining facilities.
Diluted Bitumen (Dilbit): Produced by blending non-upgraded bitumen (typically from an in-situ facility) with condensate or diluent.
Synbit: A blend of bitumen and synthetic crude oil.
Although WCS is technically a blend of upgraded and non-upgraded bitumen, as well as conventional oil and condensate, it consists primarily of non-upgraded bitumen. WCS is therefore classified as a Dilbit stream.
Exact specifications for WCS vary slightly from day-to-day. Crude Monitor provides assays for WCS samples taken monthly and allows for comparison to other streams of crude produced in Western Canada.
Aside from density and sulphur content, there are several other important properties that affect product quality and processability at the refinery.
Some of key characteristics of the WCS benchmark are tabled below.
|Density: 928 kg/m3
|WCS is technically classified as a "heavy" crude (defined as having an API density of 10 to 22.3°), bordering on "medium". WCS density is on par with most other diluted bitumen blends, typically in the range of 20-21°|
|Sulphur: 3.5%||WCS is slightly less sour than most dilbits, which typically average closer to 4% sulphur. Sulphur is considered an impurity since it must be completely removed from all final products, and sulphur can poison the catalyst during catalytic reforming. Sulphur is contained within the heavy fraction of the crude. Heavy conventional crudes typically average about 3% sulphur. Sulphur compounds also release corrosive hydrogen sulphides during high-temperature processing.|
|MCR: 10%||Micron Carbon Residue (MCR) is a measure of the crude's ability to form coke, representing the fraction of large high-carbon molecules contained in the crude. Undiluted Athabasca bitumen has an MCR of about 13.6% while a typical diluted bitumen has an MCR of about 10.5%. Crudes with a higher MCR are more costly to refine.|
|WCS has a higher sediment content than a typical Dilbit, which averages about 150 ppm by weight. Sediment accelerates erosion of both the pipeline and refinery components. Pipeline operators in Canada typically limit sediment and water content to a maximum of 0.5% by weight in total. Heavy conventional crudes produced in Western Canada also have a relatively high sediment content, typically in the order of 200 to 300 ppm.|
1.0 mg KOH/g
|TAN (Total Acid Number) is a measure of the crude's naphthenic acid concentration, which can corrode refinery equipment at elevated temperatures and pressures. Bitumen from the oil sands tends to have a higher TAN than heavy conventional oil. Since WCS contains both conventional and upgraded bitumen, it has a lower TAN than a typical Dilbit, which can average closer to 2 mg KOH/g. Crudes with TAN values greater than 1.0 are considered "high-TAN" feedstock.|
|Salt: 25 ptb||WCS is much higher in salt than a typical Dilbit, sometimes as much as four times higher. Salt concentrations are higher in heavy conventional crudes, which feed into WCS, increasing its salt content. Salts consist of sodium, magnesium and calcium chlorides, which accelerate corrosion of refinery equipment and deposit onto heat exchangers, reducing the efficiency of heat transfer. Salts also deactivate the reforming and catalytic cracking catalysts.|
|Nickel: 60 mg/L
Vanadium: 140 mg/L
|The nickel content of WCS is on par with most other Dilbits or even most conventional heavy crudes. In contrast, the concentration of vanadium in WCS is slightly lower than the average Dilbit due to relatively lower levels of vanadium in conventional heavy crude. Nickel and vanadium is detrimental to the catalysts used in cracking and desulphurization. Feeds with a higher metals content increase the frequency at which the catalyst must be replaced.|
WCS VERSUS OTHER BENCHMARK CRUDES
There are over 300 benchmark streams of crude oil produced around the world. The most commonly referenced US benchmark is West Texas Intermediate (WTI), priced out of Cushing, Oklahoma. WTI is lighter and sweeter than the international benchmark, North Sea Brent, which is priced out of Sullom Voe, Scotland.
The two most popular Canadian benchmarks are Canadian Light and Western Canadian Select. WCS is a heavy sour blend while Canadian Light is a light sweet crude, similar in quality to WTI.
Shown below is a snapshot of the most common North American benchmarks and key foreign imports.
REFINERY COMPLEXITY: AN IMPORTANT VARIABLE
Refineries typically blend different grades of crude with varying quality specifications. Depending on the configuration of the refinery, each facility has a limited ability to handle heavy grades of crude and sulphur.
A refinery's ability to handle a wide range of crudes is defined by its Nelson Complexity Index (NCI). A very complex refinery has a higher secondary conversion capacity, better able to crack heavy molecules into light value-add final products, removing all traces of sulphur. In contrast, a simple topping refinery is designed for light sweet crude, with very limited ability to handle heavier feedstock. NCI values range from 1.0 for a very simple refinery to over 15 for a very complex facility.
Almost all refineries built after 2003 are highly complex. US refineries rank the highest, averaging over 9.5 on the NCI scale. Europe has much simpler, older refineries, averaging closer to 6.5.
Canadian refineries tend to be older, averaging 8.2 on the NCI scale. Lower complexity coupled with infrastructure bottlenecks limits domestic demand for Alberta's heavy crude. Canada has a refining capacity of just under 2 million bbl/day, about 40% of which is light sweet crude imported from the US and overseas. In 2016, less than 100,000 bbl/day of heavy diluted bitumen from the oil sands was processed in Canadian refineries. The remaining 1.5 million bbl/day was exported to the US.
In contrast, the US has the world's largest refining capacity, now over 18.5 million bbl/day. They also have the some of the world's most sophisticated refineries, particularly in the Gulf Coast where refinery complexity averages well over 13 on the NCI scale. More complex refineries have a bigger appetite for heavy sour crude, which improves their refining margins.
DEMAND FOR ALBERTA'S HEAVY CRUDE
Over the past few decades, US refiners have retrofitted their facilities to process heavier grades of crude. At the same time, US production has become increasing lighter due to rapidly expanding production from US shale.
Although lighter crudes are typically thought of as "better quality", tight oil from shale deposits can be high in naphtha or paraffin, which also pose a challenge to refinery equipment. The average API density of crude oil produced in the US is now in the 40 to 45° range, causing a mismatch with the average refinery feedstock, which averages closer to 31°.
After hitting a low feedstock API of near 30° in 2008, US refineries have been trying to take in lighter oil produced domestically. Exports of American crude was largely banned under the 1975 Energy Policy and Conservation Act. Feedstock API creeped higher, reaching a high of 32° in 2014.
In 2016, the US government lifted the export ban, allowing the country to export light oil and import more heavy crude. About 40% of imports are now in the 20 to 25° range, very similar in density to WCS.
WCS PRICING: THE HEAVY OIL DISCOUNT
Unlike other benchmark crudes, WCS Crude Oil Futures Contracts, which trade on the Chicago Mercantile Exchange (CME), reflects the differential to WTI, and not the actual WCS price. This differential is often referred to as the Heavy Oil Discount.
In fact, most Canadian crudes are traded in reference to the West Texas benchmark. Aside from WCS, Canadian Light, also trades at a slight discount to WTI. Some streams such as Syncrude's Sweet Premium Blend will often trade at a premium. Edmonton condensate, depending on demand, typically trades relatively close to par.
WCS prices typically govern the selling price for heavy oil produced in Western Canada.
BENCHMARKS PRICING DIFFERENTIALS
Light sweet crude oil requires less energy to refine and should theoretically sell for a better price. This might have been true in the old days but the logistics of moving the right type of crude to the right customer creates price differentials that go far beyond just quality.
The Alberta government publishes monthly reference prices for both heavy and light oil. Shown below are the average monthly prices for Brent, WTI, WCS and heavy Maya crude from Mexico over the past two years.
Light vs Light: The supply variable
Both Brent and WTI are light, sweet crudes. Brent is the international benchmark, reflecting prices out of the UK. In contrast, WTI reflects US domestic crude, priced out of Cushing, OK.
Technically, WTI is a better quality crude, since it is lighter and lower in sulphur than Brent. Brent has historically traded at a slight discount to WTI, reflecting delivery costs into US refineries.
As US crude production from shale began to ramp up in 2011, WTI began trading at a discount to Brent due to bottlenecks between production fields, storage facilities and refineries. Coupled with the country's oil export ban, the WTI discount to Brent was as high as US$23/bbl in early 2013.
As the US built more pipeline infrastructure and storage capacity in the past few years, that discount began to narrow. The lifting of the oil export ban in early 2016 reduced the WTI discount to less than a few dollars a barrel.
OPEC's decision to take 1.8 million bbl/day of crude off the market in November 2016 has reduced the international oil supply. A recovery in US shale production has increased the supply of WTI, widening the WTI-Brent discount to about US$3/bbl in early 2017.
The price differences between Brent and WTI is therefore unrelated to quality and completely a function of supply.
WTI vs Maya: The quality gap, or not
WTI and Maya are very different in quality but priced out of adjacent geographic locations. Maya is a blend of heavy sour crudes produced offshore the southern section of the Gulf of Mexico.
Mexico was once a major supplier of heavy crude into US refineries, but production declines in recent decades and increased competition from Canada and Venezuela has significantly reduced US demand for Maya.
Although some may argue the Maya-WTI price differential reflects variances in quality, supply and demand is likely a more important variable.
In the middle of 2015, the US and Mexico agreed to a crude swap, where heavy sour crude from Mexico was traded for light oil produced from US shale. Mexican refineries are configured to run light sweet crude, whereas high-conversion refineries in the Gulf Coast get more yield from heavy crude. As a result, the price discount between WTI and Maya was reduced to near zero.
In more recent years, Maya's price discount to WTI has varied from about US$6 to US$7 a barrel. Maya is primarily exported to Asian refineries.
Heavy vs Heavy: Comparison of two sour crudes
A similar story exists for pricing differentials between Maya crude and Western Canadian Select. Maya and WCS are very similar in quality, both heavy and sour. However, WCS is priced out of land-locked Hardisty, Alberta, very far from large refining hubs in California, the Gulf Coast and US Midwest.
Before 2010, Maya traded at a slight premium to WCS. As Canadian oil production expanded, pipelines became constrained and the price gap widened, from more than US$10/bbl in the fall of 2015 to about US$8/bbl at the beginning of 2017.
WCS PRICING CONTRACTS
WCS and Canadian Light prices are posted on our website in real-time.
End-of-day closing prices for WCS, Canadian Light (formerly known as Edmonton Par), WTI and Brent are posted on our Daily Oil Prices page, in USD per barrel. WTI, WCS, Canadian Light and Edmonton Condensate prices are also posted daily, in CAD per barrel.
Monthly average settlement prices for WTI, Brent, WCS, Canadian Light and Edmonton Condensate are also posted on the last trading day of the month.
Argus has recently launched daily volume-weighted average price indexes for Western Canadian Select (WCS) at Hardisty, Cushing and Houston. The Argus Americas Crude is published daily.
Note that benchmark prices always reflect the sale price at the point of delivery, commonly termed FOB (free on board). The price for each stream therefore does not factor in delivery costs to the final customer.
Natural Resources Canada (NRCan) posts monthly average Canadian Light and WCS prices in Edmonton, Hardisty and Chicago, as well as Brent in Montreal and WTI in Chicago. NRCan prices reflect the cost of delivery to each location.