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Rock Bottom - Crude Price Crash, Pipeline Constraints Push Alberta's WCS to All-Time Low

The collapse in WTI prices in March has been a crushing blow to the Permian, the Bakken and other U.S. shale plays that produce light, sweet crude oil. But as bad as sub-$25/bbl WTI prices are — especially for producers whose balance-of-2020 volumes aren’t at least partly hedged at higher prices — consider the record-low, $5/bbl prices facing oil sands producers up north in Alberta. Western Canadian Select, the energy-rich region’s benchmark heavy-crude blend, fell below $10/bbl more than a week ago, and on Tuesday WCS closed at $5.08/bbl. Producers, who already had been dealing with major takeaway constraints, are ratcheting back their output and planned 2020 capex, and slashing the volumes they send out via rail in tank cars. Today, we begin a short blog series on the latest round of bad news hitting Western Canada’s oil patch.

Oil sands producers have a lot in common with George Chuvalo, a boxing legend in Canada. A five-time Canadian heavyweight champion, Chuvalo, now 82 years old, is best known for never being knocked to the mat in his 93 professional bouts, even when he fought the likes of Muhammad Ali (twice), George Foreman and “Smokin’ Joe” Frazier. After his 15-round challenge to Ali’s world heavyweight title in 1966, which Chuvalo lost by decision, the Canadian boxer bragged, “When it was all over, (Ali) was the guy who went to the hospital ... Me? I went dancing with my wife.” (Ali had called Chuvalo “the toughest guy I ever fought.”) Like Chuvalo, producers in the oil sands have been pummeled and knocked against the ropes many times, most recently by pipeline-project delays and dizzyingly steep price discounts, but they have remained standing –– seeing stars, maybe, but still upright, if only barely.

The three oil sands areas in northern Alberta — the giant Athabasca deposits and the smaller Peace River and Cold Lake areas — together cover only ~55,000 square miles (about one-fifth the size of Texas, or of Alberta) but they contain proven reserves equivalent to more than 160 billion barrels of crude oil, according to the International Energy Agency (IEA) and other sources. As the Shale Era has reminded everyone, though, simply having vast hydrocarbon reserves in the ground isn’t enough­­. Production costs and the cost of delivering product to market need to be competitive if an area is to continue drawing investment — at least over the long-term in the case of areas with higher upfront development costs.

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