Canada’s heavy oil producers face sustained pressure as big U.S. refineries gear up for seasonal maintenance, sapping demand just as the industry grapples with delays to proposed export pipelines.
Prices for oil sands crude have been hammered for much of this year as rising production butts up against limited pipeline capacity. Now, several major refineries that consume a large share of oil sands exports are poised to enter an extended period of maintenance. That promises to squelch demand and could weigh on prices further, dealing a blow to a sector that has largely missed out on a broad rally in U.S oil prices so far this year.
It’s a temporary hit that underlines Canadian exporters’ heavy reliance on a single market, at a time the industry is struggling with the prospect of lengthy delays to the Trans Mountain pipeline expansion – the lone outlet for Canadian oil to Pacific markets.
Five of the top 10 U.S. refiners of Canadian crude have planned maintenance scheduled over the next six months, Royal Bank of Canada energy strategist Michael Tran said on Thursday. They include BP PLC’s plant in Whiting, Ind., Exxon Mobil Corp.’s Joliet, Ill., facility and Marathon Petroleum Corp.’s refinery in Detroit.
All are expected to see “varying degrees of downtime, meaning that a significant portion of the largest consumers of Canadian heavy crudes will temporarily taper purchases,” he said in a research note. The situation is “material for a market, and a country, that remains hamstrung and has virtually no other options for moving barrels off the continent to reach alternate buyers.”
Heavy oil sands crude for October delivery on Thursday fetched around US$27 below U.S. benchmark West Texas intermediate oil, according to the Net Energy Exchange in Calgary. WTI was hovering around US$68, implying a value of roughly $54 for Western Canadian select, the heavy oil marker in Alberta.
Once a bug of the Canadian industry, steep price discounts have fast become a costly burden for big producers and governments alike as major pipeline proposals designed to expand markets face delays or outright cancellation.
Last month, a federal court overturned approvals of the $7.4-billion Trans Mountain project. The Federal Court of Appeal said the proposal to triple capacity on an existing pipeline route should be sent back to the National Energy Board for further environmental studies. It also ordered Ottawa – now the project’s owner – to conduct additional consultations with First Nations whose territory would be affected by the expansion.
Construction has been halted and it remains unclear when it will resume. Prime Minister Justin Trudeau said in Edmonton this week that Ottawa is still weighing options, including a potential appeal to the Supreme Court. However, he said a short-term legislative fix would only prompt further delays.
The court decision pleased environmentalists and some First Nations who remain opposed to the project, but it has deepened anxiety over a potential flight of investment from the oil hub of Calgary.
This week, Suncor Energy Inc. chief executive officer Steve Williams told a conference in New York that the setback for Trans Mountain further undermines investor confidence in Canada.
Much of the impact from heavy maintenance planned by U.S. refineries is already reflected in prices, said Martin King at GMP FirstEnergy in Calgary. More crude is likely to flow into inventories in the short term, but the dynamic ultimately costs money and jobs, he said.
"It's just another reminder that Canada isn't big enough to support all that crude supply, and we have one other customer," he said.