The gap between Canadian benchmark oil prices and US prices is increasing along with the gap between Canadian oil production and oil export capacity.
The growth of Alberta’s oil industry is hampered by a lack of infrastructure in the face of growing output, making market access a serious challenge that adversely affects Western Canadian Select (WCS) crude oil prices relative to other North American blends.
“A shortage of pipeline capacity and oilsands production growth has led to bottlenecks that widened the usual price gap between Canadian crude and the American benchmark” reports the CBC. The Prime Minister of Alberta, Rachel Notley, has called for an immediate solution. “There’s a lack of consensus within the industry about the best way forward, meanwhile we have a suite of options at our disposal. We don’t want it racing out of the ground at $10 a barrel.”
The Alberta government under Notley is pushing for the extension of the Trans Mountain pipeline, transporting oil from Edmonton to Burnaby, BC, to reach markets from the Pacific. The expansion would almost triple the capacity of the pipeline to 890,000 barrels per day (bpd). However, the extension was halted by a decision of the Federal Supreme Court in October 2018 that reversed Canada’s approval of the Trans-Mountain Pipeline due to the need for greater consideration of maritime shipping in the environmental review and in-depth consultation.
The impasse has led to an oversupply that has led to a huge price difference for WCS compared to West Texas Intermediate (WTI). In the past, discounts for WCS were at the same level compared to WTI, partly due to transport and refining costs. According to The Globe, a barrel of WCS has averaged $ 17 less than a barrel of WTI sold and mail over the last decade. However, this gap has risen to $ 50 per barrel in the fall of 2018, pushing prices down to as much as $ 13 a barrel in November, the lowest price point for WCS in a decade.
WCS is the benchmark for Canadian heavy oil products, which make up about fifty percent of the country’s crude oil production. Edmonton Mixed Sweet and Synthetic Crude are comparable to WTI in quality and cheaper to refine than WCS. Two lighter oils, which account for about 40 percent of Canada’s total crude oil production. They also sell their US counterparts at a low discount. According to a TD economic report, the differential for Edmonton Mixed Sweet has averaged $ 4 per barrel over the last four years, but in November the price gap widened to a record break of $ 39. The price differential at Synthetic Crude broke a record $ 34 a barrel.
With an estimated production surplus of 250,000 bpd, Premier Notley has said the effects of the rising price differential are costing the Canadian economy $ 80 million a day. However, this number was strongly refuted by others, such as longtime economist Robyn Allan. At the end of November, the Albanian government announced it would buy $ 350 million in railroad cars to bring 120,000 barrels of crude from the province to the US markets. Notley hopes that Ottawa will accept its proposal that the federal government finance the costs as a joint venture partner, which is reportedly unlikely.
A recent report from Scotiabank states that if the massive discounts in the New Year continue, the federal government must take action to reduce the impact on revenues from Alberta’s royalties, which are likely to occur if oil companies lose revenue. CBS reports that some oil producers in the region are even calling on Notley to “call for production cuts to reduce oil spills” to lower prices.