The National Energy Board has put a number on the market challenge that caused the price of Canadian heavy oil to drop to a record low last fall: 350,000 bbls/d.
That’s how much more oil was being produced than the available pipeline capacity to export it out of the basin in September 2018, the NEB estimates in a new report.
Driven by new oilsands volumes and growth in conventional light oil, the NEB said total production in western Canada reached 4.30 million bbls/d in September. Meanwhile, takeaway capacity on existing pipeline systems is estimated at 3.95 million bbls/d.
The situation as 2018 approached its close was made worse by U.S. refinery maintenance, including at BP’s Whiting Refinery in Indiana, the largest single consumer of Canadian heavy crude. Western Canadian Select hit a record low of US$13.46/bbl in November, more than US$40/bbl less than West Texas Intermediate. The “normalized” WCS discount, based on quality and location, is estimated at about US$15/bbl.
The realized pricing situation is expected to improve somewhat a result of Alberta’s mandatory 325,000-bbl/d oil production curtailment, which is now in effect, as well as the province’s commitment to purchase rail tanker cars. The first 15,000 bbls/d of that capacity is expected in December 2019.
“Immediately following the Government of Alberta curtailment announcement, the price for WCS contracted for delivery in January 2019 increased and the differential to WTI narrowed,” the NEB said.
“However, contracts for delivery in later months indicate that markets expect wider than normal differentials to remain in the longer term until pipeline capacity is addressed.”
Enbridge’s Line 3 Pipeline Replacement Project is expected to go into service in late 2019, increasing export capacity into the United States by about 375,000 bbls/d. Completion of the project will help return supply and demand to balance, but is not on its own expected to relieve overall tight market pressure or improve confidence in future growth.