The dramatic drop in global oil demand means western Canada’s storage tanks could run out of space within weeks, a dire scenario that has pushed the Alberta government to consider longer-term solutions - including a plan to establish strategic storage reserves for crude.
Kavi Bal, press secretary to Alberta Energy Minister Sonya Savage, said the government is focused on immediate financial support for the struggling oil and gas sector, but is also “reviewing every option” to ensure the long-term health of the energy industry, including strategic storage.
In more normal times, Canada exports more oil to the U.S. than it refines for domestic purposes - and the western provinces have little in the way of excess storage capacity. The industry as a whole is now scrambling to find ways to store product until demand returns. Creating reserve storage capacity in Alberta would likely come too late to help the industry now, but potentially could assist in a similar situation in the years ahead if the North American market again faces a crisis.
The province’s salt bed deposits could play a role. The ATCO Group said Tuesday it’s exploring whether creating numerous salt caverns just northeast of Edmonton could eventually provide up to 10 million barrels of strategic storage capacity. It would take two to three years to drill and clean the caverns, but they could be available in future for Canadian governments should there be other massive swings in crude markets.
The dearth of storage space in North America, coupled with obliterated demand due to the COVID-19 pandemic, saw U.S. crude oil futures collapse into negative territory for the first time in history on Monday, as desperate traders paid to get rid of barrels. Canadian oil producers are dropping production - publicly announced cuts already surpass 400,000 barrels per day, but analysts believe the true figure is closer to 700,000. Many project that number could hit more than one million barrels per day if prices remain depressed.
As the pandemic shuts down broad swathes of the global economy, usable capacity for crude oil storage in western Canada stands at about 40 to 45 million barrels, and is about 75 per cent full, the Canadian Association of Petroleum Producers (CAPP) said Tuesday.
Given sharp reductions in demand as refineries produce less petroleum products in response to lower economic activity, storage volumes could reach capacity “in just a matter of weeks," according to the industry association.
“The increased storage volumes in Canada pose a very substantial risk to the survivability of Canada’s oil and gas sector,” said Ben Brunnen, CAPP’s vice-president of fiscal and economic policy.
“This creates pressure on producers, who are confronted with very difficult decisions, and ultimately will be forced to shut-in some of their production.”
In the United States, federally-owned oil stocks are stored in huge underground salt caverns at four Strategic Petroleum Reserve sites along the coastline of the Gulf of Mexico.
The U.S. Department of Energy is in the process of leasing available space in its reserve to American oil companies to help ease the pressure from rapidly filling commercial storage. The move will take around 77 million barrels off the market, which is less than a day of typical global demand.
Originally, the main imperative of a strategic reserve was protecting the U.S. from an oil shortage. The reserves were established in reaction to the oil crisis of 1973-74, when OPEC cut supplies to western countries.
Acute storage pressures in the States already have traders hiring vessels just to anchor and fill with excess oil not being processed by refineries. A record 160 million barrels is sitting in tankers around the world, according to Reuters.
But Canada has only one pipeline, Trans Mountain, that transports oil from Alberta to a Canadian coast. The country doesn’t have the ability to store oil on supertankers and should be looking for some way to wrestle greater control over its own circumstances, said Bob Myles, executive vice president of corporate development at the ATCO Group.
“We’re at the mercy of the world around to us to take our product. And as we’re seeing when they don’t, it has a pretty significant impact on this province," Mr. Myles said.
ATCO is exploring whether its salt caverns in the Fort Saskatchewan area, just outside Edmonton, could serve as useful storage space when other tank capacity is full. Caverns are usually bigger, and less expensive, than steel tanks. Currently, ATCO uses some caverns for natural gas, propane and ethylene storage.
“It would look really bad if we don’t do anything, and we’re sitting here two to three years from now, and we haven’t done anything - and oil prices go back down again," Mr. Myles said.
Alberta’s immediate focus is on helping the energy industry through the current turmoil, which saw Monday’s market chaos bleed into Tuesday. The spot price for West Texas International, the North American benchmark for crude, again slipped into negatives Tuesday, hitting minus $US10 before closing at just over $9. Western Canadian Select hit 13 cents at one point, closing close to $4 at end of trade.
With global demand for fuel obliterated, there are few places to put North American crude, let alone contracted imports from Saudi Arabia due to land soon. U.S. President Donald Trump said Monday he is considering stopping those shipments using his presidential powers.
Canada’s storage capacity isn’t publicly tracked on a week-to-week basis, so there’s no way for analysts, investors and producers to know definitively what’s available.
Jackie Forrest, senior director of Calgary’s ARC Energy Research Institute, says the result is higher investment risks compared to competitive jurisdictions like the States.
“Not having inventory data right now is really frustrating,” she told The Globe and Mail.