Rock Bottom, Part 2 - Will Record-Low WCS Prices Spur Oil Sands Producers to Reduce Output?

The crash in global crude oil markets has meant low prices for all producers, but no place more so than in Alberta’s oil sands. Transportation, blending and quality differentials mean that benchmark Western Canadian Select (WCS) is priced at a significant discount to light, sweet West Texas Intermediate. With WTI prices seemingly stuck below $30/bbl, the absolute price of WCS last week tumbled to all-time lows below $5/bbl. If they persist, will WCS prices south of $10/bbl generate wide-scale production shut-ins in the oil sands? Today, we continue our series on the challenges facing Alberta’s oil sands.

The collapse in heavy oil prices to record-low levels has presented a crisis for Alberta’s enormous oil sands industry unlike any it has ever seen before. As we discussed in Part 1, this collapse is even worse than in late 2018, when price differentials for Alberta’s WCS benchmark blew out versus WTI in response to severe transportation constraints. So bad was the pricing for WCS 15-plus months ago that the Alberta provincial government intervened and mandated oil production curtailments to restrict supplies. This, combined with the increased use of crude-by-rail, eventually lifted WCS prices out of the cellar last year. Over the same period, benchmark light oil prices like WTI remained relatively healthy, meaning the change in the price spread was almost entirely driven by regional dynamics affecting WCS.

This time around, things are different — the prices for all varieties of crude are down to their lowest levels in years. It’s one thing for WCS to sell at a $17/bbl discount to WTI when WTI is priced at more than $60/bbl, as it was two years ago this week. When WTI is priced at only $25-30/bbl, however, that same $17/bbl spread can be disastrous to an oil sands producer. As we mentioned in Part 1, the broader oil market collapse and the record-low WCS prices already are spurring capital spending cuts. Still, while these spending reductions may delay some planned production additions, there have been few signs — so far, at least — of a major dialing back of production from existing oil sands projects.

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