The Shape I'm In - Rising Canadian Production, Takeaway Constraints and WCS Price Discounts, Part 2

Crude oil production in the Western Canadian Sedimentary Basin (WCSB) has risen by more than 50% over the past seven years to about 4 MMb/d, driven by new projects and expansions in the oil sands of Alberta. And while growth has slowed since the 2014-15 downturn in crude oil prices, oil sands output is expected to continue climbing — particularly over the next year as the new, 194-Mb/d Fort Hills project ramps up toward full operation. Most forecasts put total WCSB production at near 5 MMb/d by the mid-2020s. But while Western Canadian crude oil supply has been rising, there has been only a modest expansion of pipeline capacity out of the region, and lately takeaway constraints have had a devastating effect on the price relationship between benchmark Western Canadian Select (WCS) and West Texas Intermediate (WTI). Today, we continue our series on Canadian crude and bitumen production, existing and planned pipelines, and the effects of takeaway constraints on pricing, this time focusing on the supply side of the story.

In Part 1, we looked at the recent collapse in the price of WCS versus WTI and the 12-day shutdown of the Keystone Pipeline in November 2017, both of which put the spotlight on some major issues: Alberta production in particular is rising, pipeline takeaway capacity out of the province has not kept pace, and pipes are running so full that some owners have been forced to apportion access to them. We noted that while the WCS had been selling at a steady $10/bbl discount to WTI earlier in 2017, the pricing differential collapsed later in the year to as much as $25/bbl. While the leak and subsequent shutdown of the Keystone Pipeline in November was the spark that ignited the most recent decline in WCS prices, the fundamentals behind the widening gap between WCS and WTI prices were already in place. In today’s blog, we will dig deeper into one of these underlying market forces: rising crude oil production.

The WCSB accounts for nearly 95% of total Canadian crude oil production, and output from the vast western basin — which includes parts of British Columbia, Alberta, Saskatchewan and Manitoba — comes from either conventional wells or from the oil sands (most of which are located within Alberta). As shown in Figure 1, conventional production (blue and red layers) currently accounts for about one-third of total WCSB production, with about half of conventional production being light or medium crude (blue layer) and the other half being heavy crude (red layer). The vast majority of WCSB conventional production (more than 90%) comes from Alberta and Saskatchewan. As for the oil sands, they currently account for the other two-thirds of total WCSB production (green layer), with about 43% of oil sands output coming from mined bitumen and 57% coming from the use of in situ techniques — mostly steam-assisted gravity drainage (SAGD) wells (see We Are the Champions for more on in situ and SAGD).