Historic Price Crash Plunges Canadian Oil Patch Into Crisis

(Bloomberg) -- While the U.S. oil industry has hit a speed bump with the recent $20 drop in oil prices in New York, producers in Canada are in a full-blown crisis.

Heavy Canadian crude has been on a downward spiral since mid-May, with prices plummeting by more than 60 percent as an onslaught of new production from the oil-sands overwhelms the nation’s pipelines. In the past two months, the decline accelerated as many of the U.S. refineries that processed all that oil shut down for maintenance.

Historic Price Crash Plunges Canadian Oil Patch Into Crisis

The result is the worst pricing environment in the Canadian oil industry’s history and a disaster for a sector that accounts for about a 10th of the nation’s economy and a fifth of its exports. The crisis is threatening oil producers’ profits, causing deep divisions within the industry and putting pressure on Justin Trudeau’s government to act.

Adding to the gloom is the relatively positive outlook for the U.S. energy industry is enjoying.

“In my 36 years in this business, I have never seen such a wide differential in sentiment between Canada and the U.S.,” Kevin Neveu, chief executive officer of oilfield-service company Precision Drilling Corp., said in an interview in Calgary. “I’ve never seen more frustration among our customers and our competitors and in our peer-group companies than right now.”

Western Canada Select crude -- the main blend sold by the nation’s prolific oil sands -- closed at $13.46 a barrel on Thursday, the lowest in Bloomberg data stretching back to 2008. The blend’s discount to U.S. benchmark crude exploded to as much as $52.40 a barrel last month, also a record.

Historic Price Crash Plunges Canadian Oil Patch Into Crisis

While the price has recovered somewhat in recent weeks as some U.S. refining capacity has come back online, the crisis is far from over. The nation is still producing more oil than its pipelines can handle and its storage capacity is filled to the brim.

That has prompted some Canadian producers to take extraordinary steps, like shutting down some of their production, striking deals to ship oil via costlier rail and even asking Alberta Premier Rachel Notley, head of the country’s top oil-producing province, to mandate output cuts until the glut of oil is cleared.

Historic Price Crash Plunges Canadian Oil Patch Into Crisis

That idea has caused a rift in the industry, pitting mostly pure producers like Canadian Natural Resources Ltd., Cenovus Energy Inc. and MEG Energy Corp., who have been hammered by the low prices, against the large, integrated oil companies like Suncor Energy Inc. and Husky Energy Inc., who have their own refining capacity and are mostly unscathed by the situation.

The split has put Notley, a center-left politician in a traditionally conservative province, in a bind. While she has yet to take a position on whether to mandate production cuts, she has hinted the possibility isn’t off the table.

Meanwhile, she has appointed three special envoys to come up with short-term solutions for the crisis, accelerated efforts to build new refining and upgrading capacity in the province, pressed Trudeau’s government for help in ramping up the nation’s capacity to ship oil by rail and pushed it to speed construction of the Trans Mountain pipeline expansion, one of the major projects that could alleviate the nation’s pipeline bottlenecks.

Economic Impact

But it’s not just Alberta’s government that’s being hit by the crisis. The situation poses challenges for Canada more broadly, with estimates that the wider discount on local crude is costing the country C$80 million ($60 million) to C$100 million a day. That is already sapping growth forecasts nationally, raising pressure on Trudeau to come to the rescue.

Trudeau has no silver bullets, though. His government already bought a beleaguered oil pipeline expansion project this year in a bid to save it, only to be dealt a fresh delay by a court ruling. He has tried to push through pipelines as well as tougher environmental measures, such as a carbon tax, as a package deal. Now the crisis in the oil patch threatens support for his environmental efforts that were supposed to go hand-in-hand and is keeping the pressure on him to find quick fixes for a problem that has built up over years.

“The market as we see it today is broken and dysfunctional,” Canadian Natural Vice Chairman Steve Laut, urging a temporary cut in production to boost prices, said in an interview with BNN Bloomberg Television. “So there’s a role for the government to play to bring order back to the market.”

©2018 Bloomberg L.P.