Alberta Oil Industry (And Enbridge's Future) Is not DeadI posted this on the CVE web page and it applies here.
Take Umbrage with Goldman Sachs
Avoiding a crude expression, I am extremely angry with Goldman and others who have predicted the demise of heavy oil and bitumen and our industry. Their predictions are about as useful as the Economist prediction of $5/bbl oil forever in the early 2000’s (to match Saudi lifting costs). These so-called experts probably wouldn’t know a pump jack if it walked into their offices. They base these conclusions on wholesale gasoline at $0.52 per USG, WTI in a range of $21-$23/bbl [indicating a crack spread of near zero or less], and WCS @ $4.30 today and Wyoming sour trading below zero. They then conclude that inland continental crude supply is unfeasible now and for the long-term. They also have no appreciation that oil is not a homogeneous product and therefore not fungible. IE. Light oil does not provide a good feedstock for heavy oil refineries.
What is true is that demand in North America and the world is being severely curtailed estimated at 10.5 MMbblpd in March and up to 20 MMbblpd or more in April and probably until June as the virus shows no sign of abating. What is galling is that they seem to think that low prices will last forever and that WCS will be displaced forever by cheaper offshore crude.
During my 35 years in the patch I participated and witnessed in the development of early attempts at steam injection which led to SAGD as invented by the late Dr. Roger Butler at the U of A and the early history of heavy oil growth through the Husky and Co-Op upgraders. This was a period in which conventional oil production in north America was in and is in terminal decline, until recently with shale oil notwithstanding. The solution to lack of light feedstock was the construction of upgraders and re-tooling of Refineries in the Upper mid-West and on the USGC. Canadian heavy crude was direct connected by Enbridge in stages of pipeline expansion to specific US refineries over the last six decades. In fact, demand for heavy crude from Canada has become more important to the US as Venezuelan crude volumes have declined substantially.
The price crash in the case of WCS is not due to logistics but cuts in refinery runs caused by Covid-19 and by anticipated reduction in demand in April and beyond. The market signals are pretty strong and things are likely to get worse as and when worldwide storage fills.
How will the market cull 20 mmbblpd of oil demand (note: about 3-4 mmbblpd is NGL)? How about this from Goldman’s perspective? Let’s take the most expensive oil of the market. Boom 4.8 mmbblpd gone from Canada, boom 14 mmbblpd [1 mmbblpd of NGL’s] from the US and about 3 mmbblpd from the North Sea. Done, right. Not so fast. There are four factors which determine where a barrel is sold and for how much. They include in order of importance: market need and demand for the product (a one to one mapping of refinery design to crude composition), logistics (how will the oil get to market and how much does this cost), cash operating costs including corporate and in this environment hedging.
For those worrying about the Saud’s and Russians taking over the North America market, consider this. NA infrastructure is highly developed and integrated to serve this market and is for the most part an island or as best described, a fully integrated market with energy flows across the border both ways. The Saud’s and Russians can only deliver to us via tanker at a few ports. They cannot for example supply western Canada or the US mid-west and the US sure as hell won’t allow these actors to displace US crude in the USGC. Current US imports are at about 6.5 mmbblpd, with Canada supplying 3.5 of that. Canada has 1.9 MMbblpd of refining capacity with about 1.3 supplied by Canada. So, in this analysis,
assuming a uniform cut in demand across all end uses (we’ll only know after the smoke clears which products were hurt the most), Canadian production will be in excess by 960,000 bbls per day.
Producers are loathe to cut production; it seen as a sign of failure to meet guidance and is usually punished by the market and in the worst-case dismissal. This is an unprecedented time, one in which almost everyone alive has not seen. The anxiety of those who have and will lose their livelihoods is extreme and palpable.
However, bold action must be taken now to limit the damage of lost revenue and jobs and bankruptcies. This thing is not going away. When storage fills, demand will drop as will the WSC price. Brent will to, yes, the Saud’s and Russians will be forced to cut and WTI will drop. The bold action is to cut back production in the range of a million barrels per day or roughly twenty percent. I ask the Alberta government to take this step through the Conservation Act which was put in place to avoid wasting resources which at current prices is. As I write this there will be a meeting with OPEC plus this upcoming Thursday to hopefully address this situation in a coordinated way.
Once we cut back, the US refineries will still have to take our crude, at a reasonable price because they are designed to take heavy crude. We just should not give them too much when they don’t need it. This situation is the pipeline capacity issue in reverse and is counter intuitive to producers (see above). During the last cut back in 2018, Mayan Crude traded at WTI plus 20! And WCS rose overnight when we cut back.
At WCS at $4.30 US a producer with operating expenses of $10.00 Cdn is losing about $10.0 bbl all-in. Assuming production of 500,000 bblpd a producer is losing $5 million per day or $150 Million per month or an astounding $1.36 billion over the next nine months. If they cut 100,000 bbl per day and WSC increases to $15 US they have a netback of $5 per bbl and make $2,000,000 per day or $547 Million over the last nine months. A stunning gap!
So, in summary, the Alberta industry is not dead and I give Goldman the old George Bush one finger salute! That said we have to be bold, case we lose 600,000 bbls most of which is under take or pay.