CALGARY – Tensions caused by steep price discounts for western Canadian heavy oil are dominating discourse as Calgary-based oilsands producers roll out third-quarter results.
Tim McKay, president of Canadian Natural Resources Ltd., charged Thursday that unnamed energy industry members are deliberately interfering with attempts to make pipelines run more efficiently because they are making “windfall revenues” from current discount prices on western Canadian oil production.
His company and rivals Cenovus Energy Inc. and MEG Energy Corp. have all announced production cuts to avoid selling at least some barrels of bitumen in the current low price environment that they hope will begin to recover sometime next year.
Other producers including Suncor Energy Inc. and Husky Energy Inc. say their upgrading and refining capacity and firm access to pipelines mean they can continue to produce at capacity.
All blame a lack of export pipeline capacity to match growing heavy oil production for discounts of up to US$52 per barrel being paid for Western Canadian Select bitumen blend in comparison with New York-traded West Texas Intermediate.
But McKay said the situation is “exacerbated” by the inability of the industry’s Crude Oil Logistics Committee, which represents producers, refiners, shippers, pipeline owners and regulators to make crude oil pipeline traffic decisions, to adjust rules to optimize the process of assigning pipeline space to members.
“It is taking some time as clearly some parties, who capture windfall revenues at the expense of Alberta citizens and Alberta producers, are determined to continue to capture windfall revenues,” he charged on a call to discuss third-quarter results.
Canadian Natural announced it is curtailing heavy crude oil production amounting to between 10,000 and 15,000 barrels per day in October and 45,000 and 55,000 bpd for November and December. The company has current output of over one million barrels of oil equivalent per day of heavy, light and synthetic oil, as well as natural gas.
Full pipelines have led to shippers “nominating” more barrels than they can or need to ship in hope they will get more barrels out if Enbridge Inc. has to “apportion” space on its Mainline system, said analyst Jennifer Rowland of Edward Jones.
If the shipper doesn’t use all the space allotted, it results in “air barrels” going to market, she said.
“It hurts because if the Mainline doesn’t run optimally, then you’re not getting the maximum amount of barrels out of Canada as you could be and that has a direct negative impact to the differential,” she said.
The committee members who are most likely to benefit are U.S. refiners who buy cheap Canadian oil and turn it into products for sale to U.S. consumers, analysts said.
But Enbridge export pipelines are running as full as possible and modifications to the nomination process won’t change that, said spokeswoman Tracie Kenyon in an email.
She said the Logistics Committee deals with pipelines and terminals in the province upstream of the Mainline system, adding Enbridge has its own nomination verification and apportionment process.
“We have been consulting with our shippers since the spring on whether modifications to that process are required, and those discussions continue,” she said.
On Wednesday, Cenovus said it would slow production from its steam-driven oilsands wells using a similar process that cut 40,000 to 50,000 barrels per day for six or seven weeks early this year.
On Thursday, MEG said it would move a maintenance shutdown scheduled for next year to the current quarter, reducing fourth-quarter output by 4,000 to 6,000 bpd.
Suncor CEO Steve Williams, meanwhile, said Thursday his company’s Fort Hills oilsands mine, the newest in Alberta, will ramp up to an average of 90 per cent of its 194,000-barrel-per-day capacity, with all of its production able to get to market via contracted pipeline space.
He said the company plans to return cash to shareholders next year with more share buybacks and a likely increase in dividend.
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Companies mentioned in this article: (TSX:CNQ, TSX:CVE, TSX:MEG, TSX:SU, TSX:HSE, TSX:ENB)