The Shape I'm In - Rising Canadian Production, Takeaway Constraints and WCS Price Discounts, Part 6

The weeks-long shutdown at Syncrude Canada’s oil sands production facility in northeastern Alberta will alleviate pipeline takeaway constraints that have significantly widened the price spread between Western Canadian Select (WCS) and West Texas Intermediate (WTI) crude oil. But when Syncrude returns later this summer, there’s every reason to believe that the constraints will too, as will the need for significantly more crude-by-rail shipments. Railed volumes out of Western Canada have been increasing in recent months, but not by enough to avert WCS-WTI differential blowouts to $25 and even $30/bbl. The catch is that most of the rail-terminal capacity built a few years ago is mothballed, and that railroads are reluctant to dedicate more locomotives and personnel unless shippers make one-, two- or even three-year commitments to take-or-pay for that logistical support. Today, we consider the ongoing challenges Western Canadian producers face in moving their crude to market.

Western Canadian Select (WCS), a heavy crude oil blend, has been selling for about $25/bbl less than West Texas Intermediate (WTI) at the Cushing, OK, hub — a hard-to-bear experience for oil sands producers that have made big investments over the past few years to ratchet up their output. And the WCS/WTI spread is unlikely to improve much any time soon. Pipeline takeaway capacity out of Alberta has not kept pace with oil sands production growth, and existing pipes are running so full that some owners have been forced to apportion access to them. Crude-by-rail (CBR) is a relief valve, but it can be costly. Worse yet, production continues to increase and the addition of new pipeline capacity is two years away — maybe more — so deep discounts for WCS are likely to stick around. Today, we discuss highlights from our new Drill Down Report on Western Canadian crude markets.

The recent collapse in the price of Western Canadian Select (WCS) versus West Texas Intermediate (WTI) and the 12-day shutdown of the Keystone Pipeline in November 2017 put the spotlight on a major issue: Alberta production 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. Storage and crude-by-rail shipments have served as a cushion of sorts, absorbing shocks like the Keystone outage and the apportionments, but with more production gains expected in 2018-19, that cushion seems uncomfortably thin and unforgiving. With all this going on, we decided that it’s time for a deep-dive look at Western Canadian production, takeaway options and WCS prices — the whole kit and caboodle. Today, we begin a new series on Canadian crude and bitumen production, the infrastructure in place (and being planned) to deal with it, and the effects of takeaway constraints on pricing.