Providing coverage of Alaska and northern Canada's oil and gas industry
November 2018

Vol. 23, No.47 Week of November 25, 2018

Alberta over a barrel: pure-play v. integrated companies; low prices

Gary Park

for Petroleum News

A rift without parallel is tearing through the ranks of Canada’s oil industry.

Pure play oil sands operators are lined up against integrated companies - those who both produce and refine.

As the West Texas Intermediate price has tumbled under US$60 a barrel it has dragged down the return on Western Canada Select bitumen-blend to US$18 and, briefly, below US$15 when a U.S. federal judge halted work on TransCanada’s Keystone XL pipeline.

The Canadian Association of Petroleum Producers has estimated that the price discount cost Canada C$13 billion in the first 10 months of 2018, or about C$50 million a day.

“The differential has blown out to such an extreme level for two reasons: the lack of access to markets and the fact that we have only one customer (the U.S.),” said Tim McMillan, chief executive officer of CAPP.

He suggested the cloak of secrecy that surrounds transportation and marketing makes it impossible to get a precise estimate on how much the discounts are costing, but said it is entirely possible the real costs could reach C$100 billion a year.

Campaign for curtailment

Cenovus Energy and Canadian Natural Resources - accompanied by junior producers Athabasca Oil and Whitecap Resources - are campaigning for the Alberta government to temporarily curtail oil output in the province to cope with the bottleneck in pipelines.

Athabasca CEO Ron Broen said the government has legislation on the books to ask producers to restrain production and that would “have an immediate impact on the (price) differentials.”

He said Premier Rachel Notley should determine “what is best for the people of Alberta and not any particular company or big industry.”

Cenovus CEO Alex Pourbaix said Canadian crude is “now the lowest-price oil in the world. This is a crisis for governments, the industry and every person in Alberta who relies on services that depend on resource revenues.”

The company said, “this is an extraordinary situation brought on by extraordinary circumstances.”

“Our inability as a country to build critical new pipeline projects means we are now in a situation where we can’t get our growing oil production to market. This has resulted in a market failure.”

Cenovus pointed out that Alberta used the current legislation nearly 40 years ago to impose mandatory production cuts during a dispute with the Canadian government over a national energy program, adding that “government has a duty to protect the value of its oil resources on behalf of Albertans.”

Pourbaix said companies on both sides of the issue are unable to negotiate a settlement because that would be seen as collaboration, whereas the Notley government can use its existing legislation to order a temporary reduction to alleviate the price discounts.

Integrated companies don’t want cuts

On the other side of the fence, the leading integrated companies - Suncor Energy, Imperial Oil and Husky Energy - show no signs of endorsing the campaign for production cuts.

They all argue that market forces should prevail, which means the lower the price of WCS the cheaper they can acquire feedstock for refineries.

That view was endorsed by Martin King, an analyst with GMP FirstEnergy, who said it would be simply better to let the market deal with excess supplies than to have the province intervene.

“It’s going to be ugly to watch, but the market will end up correcting this faster than any kind of government edict would bring about,” he told the Calgary Herald.

Whitecap CEO Grant Fagerheim said he generally prefers market solutions, but he noted the transportation system is broken because of the Canadian government’s inability to see construction proceed on pipelines such as the Trans Mountain expansion and Enbridge’s Northern Gateway.

He said a market failure caused by governments can only be fixed through political intervention, calling for a “roundtable discussion” to determine the benefits of suspending output.

Report: Voluntary reduction

A report by Peters & Co. estimates the industry has already voluntarily reduced production by about 140,000 barrels per day of bitumen and heavy oil.

Pourbaix estimated that an effective solution would need cutbacks of 200,000 to 300,000 bpd.

So far, the Notley government has skirted a public debate on the issue of curtailment, opting instead to lobby the Canadian government to buy more tanker cars to boost crude-by-rail shipments out of Alberta, while pressing for more pipelines to be built.

Alberta Energy Minister Marg McCuaig-Boyd said the crude-by-rail option is currently receiving the most attention.

Warning letter from large investor

The sense of urgency, as companies start preparing capital budgets for 2019, got a sharp jolt from Darren Peers, an analyst at Los Angeles-based Capital Group, which runs about US$1.7 trillion in global assets, including a stake of US$30 billion in Canada’s oil patch and is the largest shareholder in Suncor, Canadian Natural, Enbridge and Keyera, along with significant stakes in TransCanada, Cenovus and Whitecap.

In a letter to Prime Minister Justin Trudeau, Peers warned that investors and companies will avoid the Canadian energy sector unless more is done to improve market access.

“Capital Group’s energy investments are increasingly shifting to other jurisdictions and that is likely to continue without strong government action,” he wrote. “I hope that your government will be even more proactive in securing market access which will assure the competitiveness of Canadian energy companies.”

Peers candidly warned Trudeau that if market access continues to be under threat “global investors will seek opportunities elsewhere and the Canadian companies will be further impaired. (They) will struggle to access capital, create jobs, develop resources and provide a significant revenue stream (for Canada).”

Martin Pelletier, portfolio manager at TriVest Wealth Counsel in Calgary, said “desperate times call for desperate measures,” but he would sooner see the industry come up with a solution that have the government impose one.

Where the province could play an important role would be to involve oil executives to mediate an industry-led agreement.

A spokeswoman for Canada’s Natural Resources Minister Amarjeet Sohi said the government understands “that market access is an essential component to Canadian competitiveness and that is why we are working hard to expand to non-U.S., global markets.”


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