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April 24, 2020

Low WCS price for Alberta oil causes larger cuts in production

By GlobalData Energy

Similar to other oil-producing nations, Canada is suffering from unusually low oil prices and uncertainty in future oil demand. Earlier this month the main Canadian oil benchmark, the West Canadian Select (WCS), plummeted below $5 per barrel dragged by the fall in the West Texas Intermediate (WTI) price and also because of the lower demand of the heavy crude grade by refineries.

Oil sands projects account for more than 60% of total production in the country. These projects have a particularly high operating expenditure due to required blending with lighter hydrocarbons to make the crude flow through the pipelines and reach the standard quality to be sold as the WCS blend.

Oil sands projects on average require a break-even price of $52 per barrel of oil. None of the facilities are profitable at current prices, forcing producers to cut back capital expenditure. This has impacted investments into planned projects and expansions of existing operations and caused temporary suspensions of some facilities.

ConocoPhillips, Husky Energy, Cenovus Energy and several other operators have voluntarily agreed to production cuts effective immediately or in the following month. According to the GlobalData estimate, crude oil production in Canada will drop by nearly 600 thousand barrels per day (mbd) compared to 2019 and reach 3.6 million barrels per day (mmbd) in 2020.

With an average discount to WTI of approximately $18 per barrel, the WCS blend is currently in the lowest possible levels. Consequently, many oil sand project cash flows have turned negative, leading to the shutting in of producing wells or even to a complete suspension of projects.

To this date, all supply cuts are market-driven with no intervention from the government. Just a year ago, Alberta’s Government did put a mandatory oil production curtailment to ease the pressure on congested pipelines and storage with the aim of supporting WCS prices.

Assuming the oil price does not recover in the next year, 2021 oil supply from Canada will likely continue to experience negative growth. Moreover, unlike unconventional drilling, which can be restarted relatively quickly, in situ production of bitumen is a lengthy process that requires approximately 3-6 months to heat the drainage area around producing wells to begin oil extraction. This can further slow down bringing back oil sands production.

 

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