Constrained Canadian oil sands hit by corona virus and carbon concerns

• DOI: http://doi.org/10.1111/oet.12813
• Date: 01 September 2020
• Published date: 01 September 2020

FOCUS

Constrained Canadian oil sands hit by corona virus

and carbon concerns

Decarbonization targets and a squeeze in demand

because of the corona virus are hitting Canada's oil sands,

with output dipping and capex down sharply, while more

companies delay projects or write off reserves. However,

while the return of output may be relatively slow, longer-

term output forecasts remain robust—given sufficient

pipeline access, reasonable crude differentials, and lim-

ited tightening of environmental regulations.

Canada's oil sands are marginal at the best of times,

being costly to develop, with major environmental degra-

dation and high emissions, and often significant dis-

counts to WTI (oil sands output is priced against regional

benchmark, West Canadian Select [WCS]) because of

limited export capacity (see below). However, the oil

sands do offer huge reserves (estimated at 166 bn bbl

1

), a

stable and secure above ground environment (apart from

carbon taxes and other environmental regulations), and

proximity to major North American markets and

skillsets. Just a few months ago, there was some expecta-

tion that the investment picture would improve this year

as new pipelines came online. But now the coronavirus

pandemic has led many producers to shut-in output on

commercial grounds and cut investment.

At their peak in March/April, the cuts reached almost

1 mn bpd (see Figure 1). But since May some producers

have slowly begun to bring back production, and most

volume should have returned by the end of the year—

barring another damaging wave of coronavirus. The situ-

ation has resulted in spare capacity in the country's nor-

mally congested pipelines, which has boosted WCS

relative to (weak) WTI. But as production returns, the dif-

ferential could widen again. In an attempt to keep WCS

prices firm relative to WTI, the state of Alberta has an

output curtailment policy, which cuts demand for pipe-

line export capacity (a higher capacity charge pushes

down WCS relative to WTI). But even with this in place,

nominations to ship heavy oil on Enbridge's Mainline

pipeline export network would regularly exceed capacity

by over 40% before the pandemic—compared to just 7%

in August and 3% in July, due to the shut-ins. Much of

the surplus was exported by rail (see below).

Among those projects affected by the cuts, Canada's big-

gest oil and gas company, Suncor, closed one of two

trains at Fort Hills, and has yet to decide the date to

restore it. A restart will require “a relatively stable price

environment,”but Alberta's output restrictions will be a

factor, too, according to the company. Suncor also cut

capital spending in the second quarter to C$422 mn, less

than a half of Q1 levels. Overall, IHS estimated (in April)

that capex cuts this year would amount to $6 bn among

oil sands producers.

2

The shutdowns have drained Western Canadian oil

inventories, and some capacity is still being taken offline

for early maintenance. Canadian Natural Resources'

Albian mine, as well as the Scotford upgrader, underwent

work through August and maintenance is planned in

September on the Horizon and Husky's Lloydminster

upgraders.

However, some companies are already bringing back

output, including Cenovus Energy, which is returning

shut-in production at its steam-assisted gravity drainage

bitumen projects. In late July, Cenovus said it had raised

output in response to a rebound in prices for heavy WCS

crude, produc ing 405 000 bpd of bitumen in June, after

dropping production to 344 000 bpd in April. As prices

have increased, Cenovus has bought low-priced credits

from its rivals that allow it to lift production above its

Alberta government output cap. CNRL is also boosting

output, and by mid-August it reported cuts of less than

10 000 bpd, compared to as much as 120 000 bpd in May.

With pipeline space available, crude-by-rail ship-

ments have collapsed, falling to a 4-year low in May,

according to the Canadian Energy Regulator. Cenovus'

100 000 bpd Bruderheim, Alberta, terminal was largely

inactive throughout the second quarter. But, with pipe-

line capacity already filling again, the price difference

between WTI and WCS is expected to widen once more

by the end of the year. This could see crude-by rail ship-

ments return, driven by growing demand for heavy oil

from refiners on the US Gulf Coast.

1|RIGHTTIMETOWRITEDOWN

As well as production and capex cuts, anticipated lower

prices resulting from the COVID-19 hit to demand,

DOI: 10.1111/oet.12813

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