Record low Canadian oil prices risk deteriorating significantly cash flows and key credit metrics at Canada’s oil and gas producers, rating agency DBRS said on Wednesday in the latest warning that the ultra-cheap Western Canadian crude is taking its toll on Alberta’s oil industry and economy.
Severe takeaway capacity constraints have resulted in Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands—plunging to as low as $14 a barrel earlier this month, with its discount to the U.S. benchmark WTI at around $50 a barrel.
In the face of further delays in new pipeline approvals, most notably the blow to the Trans Mountain expansion project in late August, the Alberta province and its oil producers are looking for alternative medium-term solutions such as increased crude by rail shipments or, possibly, an industry-wide production cut to ease bottlenecks and drive heavy oil prices up.
If WTI drops into the low $40s—which could be the result of OPEC and allies failing to rebalance the market and/or if global demand outlook further weakens—“DBRS may be compelled to take negative rating actions” on Canadian oil and gas companies exposed to Western Canada, the rating agency said in its report.
Ratings cuts could constrain the companies’ access to credit or drive up the costs to service their debts.
DBRS doesn’t expect to take near-term rating actions, however, and keeps its current oil price forecasts at $60 for WTI and $65 for Brent for 2019 and 2020 for evaluating the companies’ credit metrics.
Nevertheless, the rating agency warns that the huge WCS price discount is spilling into lighter crude grades because of the constrained takeaway capacity. Synthetic crude in Western Canada is currently priced at $30, a $22 discount to WTI, while Edmonton Sweet Mix, which is comparable in quality to WTI, is close to $25—some $27 discount to WTI, DBRS noted.
“It’s very unusual. I’ve never seen … this disconnect between Canada and the rest of the world, unfortunately, because of the increase in supply and not sufficient enough expansion of takeaway capacity,” Victor Vallance, senior vice-president of energy, global corporates, at DBRS, told The Canadian Press.
Alberta is trying to alleviate some of the pressure on Canada’s oil and is also seeking federal government support to do so.
Alberta Premier Rachel Notley announced on Wednesday that the province had begun negotiations for an investment in new rail capacity to move 120,000 bpd out of the province, starting late 2019. The current wide price differential between WCS and WTI costs Canada’s economy US$60 million (C$80 million) a day, Premier Notley said, adding that “we need the federal government, at the table, treating this like the crisis it is.”
“Coca Cola sell sugar-flavored water for more, we are essentially giving our oil away for free,” Premier Notley said in Ottawa on Wednesday.
In an interview with CTV, Notley said, commenting on Alberta’s oil price distress:
“We’d rather be dealing with pipeline economics not rail economics, but it’s certainly better than distress barrel economics which is what we are seeing today with WCS at $10 a barrel—it’s ridiculous.”
Referring to the calls for industry-wide production cuts, Notley said that the Alberta government has been “leaning into and considering” some sort of production cuts for well over a month now, but noted that it’s a complex issue and the province is doing a thorough analysis of the potential consequences of that option. The Alberta government hopes to give some clarity on this option within days rather than weeks, she said.
Also on Wednesday, opposition United Conservative Leader Jason Kenney called for a temporary short-term mandatory curtailment of some 400,000 bpd of oil production, or 10 percent of output, to “stop the fire sale of Alberta oil.”
“As a free market conservative, I have been reluctant to support a mandatory cut in production. But this crisis was created by a failure of governments, not businesses, to get global access for our energy. And now only governments can stop the current giveaway of Alberta oil which could result in huge job layoffs and billions of dollars in lost revenues,” Kenney said in a statement.
Canada’s oil producers appear to be split on the idea of production cuts, with some resisting such proposals while others already scaling back heavy oil drilling in response to the huge price discount.
The province of Alberta is set to soon announce what it thinks about cuts. Even if mandatory cuts are not enforced, some Canadian producers may have to curtail production due to economics amid record low crude prices and deteriorating cash flows, with the earliest possible pipeline capacity relief expected at end-2019 with Enbridge’s project to replace Line 3.
By Tsvetana Paraskova for Oilprice.com
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