Oil sands producers are facing renewed price weakness even as the industry basks in the afterglow of a major pipeline approval.
TransCanada Corp.'s proposed Keystone XL cleared a big hurdle this week after Nebraska regulators narrowly approved the $8-billion (U.S.) project, bringing the industry one step closer to forging a long-sought link with refineries on the U.S. Gulf Coast.
But the good news for hard-hit Alberta producers has been largely overshadowed with opponents vowing to appeal the decision and prices for oil sands-derived crude sinking to fresh lows.
Prices for Western Canadian Select (WCS), a blend of heavy crude and bitumen from the oil sands, have been hit by an outage on TransCanada's original Keystone line, a key artery that carries about 590,000 barrels a day of oil from Hardisty, Alta., to markets in the U.S. Midwest.
The line was shut last week following a 5,000-barrel spill in South Dakota, and the company has not indicated when it will restart. Adding to pressure, Enbridge Inc. has also rationed space on its Line 67 heavy-oil conduit for the month of December.
A trade industry source said the move was due to a combination of high demand and maintenance on the line, but analysts also view such restrictions as a harbinger of future constraints.
This year, WCS has traded in a narrow band to U.S. crude, signalling there's enough room to move barrels on existing pipelines, said Judith Dwarkin, chief economist at RS Energy Group in Calgary. That could change as rising oil sands production tests the limits of current export capacity.
"In the longer term, there will be a need for new incremental pipeline capacity to accommodate the growth that's expected," she said by phone. "There's no question."
WCS barrels for January delivery on Tuesday fetched about $16.10 less than U.S. benchmark West Texas intermediate oil, broker Net Energy Inc. said, against a discount of around $14.20 last week.
U.S. crude settled Tuesday at $56.83 a barrel, implying a value of roughly $52.07 (Canadian) for the heavy oil, based on the current exchange rate.
Canadian heavy crude trades at a discount to the headline North American price because it requires more processing and refining equipment to turn it into transportation fuels such as gasoline and diesel.
The price gap, known as the differential, fluctuates for a variety of reasons that also include supply gluts or disruptions to overall demand. In 2013, for example, the spread mushroomed to more than $40 (U.S.) per barrel.
Producers have invested heavily in terminals to ship production by train, making such deep discounts unlikely today. However, some of the current weakness is more structural, driven by fast-rising output and maintenance finishing at existing plants, said Mark Oberstoetter at consultancy Wood Mackenzie.
Suncor Energy Inc., Canadian Natural Resources Ltd. and others have sunk billions of dollars into expansions through the downturn, with much of the spending committed before crude prices crashed.
Those barrels are poised to hit a market that's increasingly swollen with supplies, effectively making the industry more vulnerable to sudden pipeline or refinery outages, Mr. Oberstoetter said. Meanwhile, the fate of projects such as Keystone XL remain uncertain.
TransCanada has said it is studying the Nebraska approval, which okayed an alternative to the company's preferred route through the state. Opponents have vowed to fight the 830,000-barrel-a-day project, raising the spectre of additional delays and costs.
Rival Kinder Morgan Canada Ltd.'s proposed Trans Mountain expansion through British Columbia has already been pushed back by at least nine months, meaning crude won't flow until late 2020 at the earliest.
"You're finally seeing that looming scenario we've been talking about, where supply is filling up that pipeline capacity," Mr. Oberstoetter said.
"Any disruptions to the pipeline system will definitely drive a spike to [the WCS differential], given it's more sensitive and there's less leeway."