As the biggest Canadian oil producers reported Q3 earnings in the past two weeks, analysts were more interested in the companies' expectations about takeaway capacity rather than earnings, due to the record-wide price differential of Canada's heavy oil to WTI.
Acknowledging that the record low prices of Western Canadian Select (WCS)-the benchmark price of oil from Canada's oil sands delivered at Hardisty, Alberta-is an anomaly on the market, many of the biggest oil producers in Canada expect some relief to come in the short term with U.S. refineries returning from maintenance this quarter and with crude-by-rail shipments to the U.S. continuing to set new records in the coming months.
Despite these short-term eases in capacity constraints, Canadian oil producers pin their hopes on at least one pipeline (Enbridge Line 3) out of Canada going into service at the latter half of 2019, to further alleviate bottlenecks and return the WCS prices to their normal discount to WTI.
With WCS selling for as low as US$20 in recent weeks, some of Canada's producers curtailed heavy oil production in Q3 and some struck agreements with rail companies to transport their crude to the U.S. market. Operations and expectations at each of the companies vary, but their collective underlying message in Q3 earnings calls was that although some relief could be coming soon, high differentials may persist until pipelines come into service. Related: There's No Strong Fundamental Reason For Oil's Decline
Due to the record low heavy oil prices, Cenovus Energy, for example, is currently operating its Foster Creek and Christina Lake projects at reduced volumes. On the earnings call, Cenovus Energy's President and CEO Alex Pourbaix urged the Canadian industry to slow down production to ease bottlenecks.
"And I want to be clear on this, the industry right now has a production problem. We're going to do our part but we are not going to carry the industry on our back. I think this is something that has to be dealt with on an industry wide basis," Pourbaix said.
In September, Cenovus signed three-year deals with rail companies to transport around 100,000 bpd of heavy crude oil from northern Alberta to various destinations on the U.S. Gulf Coast, starting in the fourth quarter of 2018.
The company is looking to further expand crude-by-rail deals, Pourbaix said in an interview with Reuters last week. According to the manager, Canada's oil producers are currently shipping a record high of around 250,000 bpd of crude by rail and total shipments could jump to 300,000 bpd by the end of 2018 and 450,000 bpd by end-2019.
Amid the record low heavy oil prices in Q3, Canadian Natural Resources also slowed down heavy oil well drillings and completions, allocating more capital to light crude oil assets from heavy crude oil.
At the earnings call last week, Canadian Natural's top executives said that the company expects both Trans Mountain and Keystone XL pipelines to be built.
Canadian Natural also holds 50 percent in North West refinery expected to take 80,000 bpd of heavy oil shortly. The company believes there will be 600,000 bpd of takeaway capacity over the course of the next year, with Line 3 the biggest part of that in Q4 2019.
"As a result, it's our view the market anomaly is most likely a 9- to 12-month event. Capacity is committing," President Tim McKay said.
Suncor Energy, for its part, doesn't need to scale back production like some of its competitors do in response to the steep discounts of Canadian oil, CEO Steve Williams said last week.
Related: Analysts See Opportunities In Embattled Energy Stocks
"We have minimal exposure to the widening Canadian heavy differentials," Williams said on the earnings call.
Husky Energy, however, doesn't expect any relief in heavy oil price spreads until 2021.
"[W]e are assuming that high differentials continue certainly the rest of this year, all of next year, all of the year after that, and then we start seeing some structural relief from some of these pipelines if they come on according to the kind of current schedule which for the close industry watchers you'll know is always a very uncertain expectations they've tended to go backwards," President and CEO Rob Peabody said on the earnings call.
Short-term relief may be coming with additional crude-by-rail shipments, more refining capacity in Canada, and U.S. refineries returning from maintenance this quarter. Yet, Canadian oil producers may have to suffer another year or two of very low heavy oil prices, until a pipeline comes online to alleviate market access constraints.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More