Canadian oil prices are suffering because there are few transportation options available to move Canada’s crude oil. CP Rail photo.

Fall in Canadian oil prices means a daily loss of tens millions of dollars in revenue

While world crude prices recover, Western Canadian oil prices are slipping due to a lack of transportation capacity.  Currently crude pipelines are full and Canada’s railways say they won’t be a stopgap solution for producers while they wait for pipelines to be built.

On Tuesday, Canadian benchmark Western Canadian Select was trading at $33.57/barrel, after falling $8 in two days.  Meanwhile, West Texas Intermediate traded for US$64.75/barrel, up US$1.35 over the same period.

This deep discount for Canadian crude means a loss of millions of dollars in revenue, taxes and royalties for Canadian producers and governments.  As well, cheaper Canadian crude is a gain for US oil market, Canada’s only export customer.

Late last week, the Canadian Pacific Railway said it was not interested in carrying large quantities of Canadian oil which is currently backed up into storage tanks due to full pipelines.

“We understand crude is only going to be here for a limited period of time,” the Financial Post reports CP Rail CEO Keith Creel said to analysts in a conference call Thursday to discuss fourth quarter results. “We are looking for strategic partners with long-term objectives that allows us to have a more stable book of business.”

Crude volumes transported by CP Rail will increase this year to 60,000 carloads from 48,000 in 2017, but Creel added limited space would go to those who “appreciate that capacity”.  He said CP would not allow itself to be “commoditized”.

Railways and producers are now in a standoff with rail companies not wanting to be a “swing shipper” and producers refusing to agree to longer term contracts with rail lines.

“This has put railroads in a negotiating position whereby they are asking for longer and longer terms,” Tim Pickering, founder and chief investment officer at Auspice Capital Advisors told the Financial Post. “To the best of our knowledge, producers have been firm in their stance and have seemingly resisted on both price and term.”

Kinder Morgan’s Trans Mountain expansion, TransCanada’s Keystone XL and Enbridge’s Line 3 are the new capacity producers are waiting for, but all three are mired in regulatory delays and legal challenges.

Adding to the problem, TransCanada’s Keystone pipeline is operating at 20 per cent reduced pressure following a leak in South Dakota in December.  The restriction has been imposed by the US Pipeline and Hazardous Materials Safety Administration.

“Times are tough in the Canadian oilpatch”, Peter Howard, president emeritus of the Canadian Energy Research Institute told the Financial Post.  This despite production increases from about 2.5 million barrels per day (b/d) to almost 4 million b/d by the end of 2017.

“While other North American producers have been enjoying the gradual rise in WTI pricing over the past year, Canadian producers have suffered through declining prices for WCS, the Canadian heavy blend crude benchmark — especially over the past few months,” Howard writes in a blog for RBN Energy.

Until late summer last year, WCS had a pricing discount against WTI of about US$10/barrel and has risen steadily since then.  In November, it rose to US$25/barrel, about the time of the Keystone leak.

“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 2018-2019, that cushion seems uncomfortably thin and unforgiving,” writes Howard.  He adds the widening differential is not a short-term phenomenon.