Soaring U.S. oil production and weak demand is putting the squeeze on Canadian crude producers, with sharply discounted prices underscoring the growing challenges they face in their only export market.
Western Canadian oil companies have seen the price of their crude drop as a result of the lack of pipeline outlets from landlocked U.S. markets, coupled with growing U.S. production and unplanned refinery shutdowns.
Canadian producers have been counting on winning a bigger share of the stagnant U.S. market to fuel oil sands expansion, but need new pipeline capacity to secure access to the massive Gulf Coast refining hub. They are also confronting another threat: what energy consultants IHS CERA calls the "great revival" in U.S. oil production that is taking up pipeline capacity and competing to supply refiners' demand.
With stagnant U.S. demand and new competition from American producers, Canadian producers are facing steep price discounts, especially when temporary refinery problems in the U.S. Midwest further erode demand for oil sands crude.
The refinery issues are temporary: BP PLC's 400,000-barrel-a-day refinery in Whiting, Ind., which processed oil sands bitumen, is back in operation after its shutdown last week drove down Canadian crude prices.
But the bigger concern is that the construction of pipelines is not keeping pace with the industry's need to ship rising volumes beyond its current reach in the landlocked U.S. mid-continent.
In recent weeks, prices for Western Canadian heavy oil and synthetic crude made from upgraded bitumen have dropped significantly against the benchmark U.S. crude West Texas intermediate. That Canadian discount is compounded by a gaping differential in price between WTI and internationally traded crudes such as North Sea Brent, which have been driven higher by strong Asian demand and turmoil in the Middle East.
The widening discount affects different companies differently.
Cenovus Energy Inc. is a partner with ConocoPhillips Co. in two U.S. refineries that benefit from the cheaper crude, offsetting the upstream revenue losses, Cenovus executive vice-president Harbir Chhina told an investors conference in Vale, Colo.
In contrast, Canadian Natural Resources Ltd. has little shelter from the price pressures, but vice-chairman John Langille played down the sharp discount as a temporary "blip."
The company, which plans to double its oil production to one million barrels per day in the next decade, is counting on new pipeline connections to the refining hub on the U.S. Gulf Coast to gain premium prices, Mr. Langille told the same investors' conference in Vale on Wednesday.
The steep discounts for Canadian crude underscore the need for new pipeline access, both to the U.S. Gulf Coast and through British Columbia to gain access to Asian markets, said Jackie Forrest, Calgary-based analyst with IHS CERA.
Like the oil company executives, Ms. Forrest assumes those pipelines will eventually be built, though perhaps not as quickly as the industry would like.
But with TransCanada Corp.'s Keystone XL project stalled in the United States, and Enbridge Inc.'s Northern Gateway facing a lengthy review process, there are concerns that the industry will have trouble keeping up with rapidly increasing demand for pipeline capacity on both sides of the border.
"If you weren't to get any pipelines built and you were to continue to add this [U.S.]production, we'd see wider and wider differentials and eventually that would effect the economics of the [oil sands]projects and slow down growth," Ms. Forrest said.
But even with the growth in U.S. production, Canadian oil sands producers can expect to find eager buyers among refiners on the Gulf Coast, so long as the pipelines get built, said Roger Ihne, an industry consultant at Deloitte Consulting LLP in Houston.
Many of those Gulf Coast refiners have invested billions of dollars so they can handle heavy oil, such as the blend from the oil sands, and are eager to replace declining Mexican and Venezuelan imports with Canadian crude.
Mr. Ihne said he expects growing U.S. production will replace imports from offshore producers, rather than Canadian supply. But that, he stressed, depends on the Keystone XL pipeline being approved and built.