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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Canada’s Oil Crisis Continues To Worsen

Enbridge pipeline

Canadian oil producers can’t get a break. First it was the pipelines — there are not enough of them to carry the crude from Alberta’s oil sands to export markets. This pipeline capacity problem has been forcing producers to pay higher rates for railway transportation, which has naturally hurt their margins in no small way. Now, there is a shortage of rail cars as well.

The situation is going from bad to worse for Canadian producers who can’t seem to catch a break. Canadian railway operators are fighting harsh winter weather and finding it hard to supply enough cars to move both crude oil from Alberta and grain from the Prairies.

The harsh weather is just the latest factor, however. Before that, there was the 45-percent surge in demand for rail cars from the oil industry, Bloomberg reports, citing Canadian National Railway. The surge happened in the third quarter of last year, and Canadian National’s chief executive Ghislain Houle says that it took the company “a little bit by surprise.” This surprise has led to “pinch points” on the railway operator’s network, further aggravating an already bad situation.

As a result, crude oil remains in Alberta and prices fall further because Alberta is where the local crude is priced, Bloomberg’s Jen Skerritt and Robert Tuttle note. In fact, Canadian crude is currently trading at the biggest discount to West Texas Intermediate in four years, at $30.60 per barrel. The blow is particularly severe as it comes amid improving oil prices elsewhere driven by the stock market recovery.

The light at the end of the tunnel is barely a glimmer. Despite federal government support for the Trans Mountain pipeline expansion project, it is still facing obstacles that may result in it never seeing the light of day. The project that would boost the current pipeline’s capacity from 300,000 bpd to 890,000 bpd, accommodating much of the increased Alberta bitumen production, is being challenged in court and Kinder Morgan has yet to collect even half of the necessary permits to proceed with it. There are no other major pipeline projects in Canada that have been approved. Related: The World’s Most Gridlocked Cities

Meanwhile, the news from the research front is not good, either. Back in September, media outlets reported on an accidental discovery that could make transporting bitumen by rail much safer by turning the crude into pellets. This would minimize the danger of a spill but, some said at the time, would increase transportation costs.

Canadian national Railway is also working on its own bitumen pellet technology it calls CanaPux, but for now it has not yet been commercialized, perhaps for the same reason of cost. Yet bitumen pellets, some observers note, could be the best solution to the current conflict between Alberta and British Columbia. The latter is doing everything it can to stall Trans Mountain’s expansion citing environmental concerns. Alberta stopped importing B.C. wines in retaliation.

But bitumen pellets are safe, their creators say, so B.C. would have nothing to worry about. And yet, like grain, these pellets would need rail cars to transport them should this option be chosen despite cost considerations. Canadian National says it plans to hike its capex to $2.6 billion this year in response to the shortage. The effect of the surprise jump in demand for railcar capacity from the oil industry should also subside eventually. The only question is how much all these factors would hurt Canada’s oil production growth in the meantime.

By Irina Slav for Oilprice.com

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  • Ness on February 19 2018 said:
    These Canadian oil producers have no one to blame but themselves. They purse production growth at all costs. They have done the worlds most amazing job of destroying shareholder value. It why investors left and are never coming back. 60 to 80 year olds think they know it all. Think doing the same thing over and over will yield different results. Things will get interesting when one of their largest sources of cash printing shares can’t be done anymore Amazing part is they keep increasing production at non stop pace. Over 200k barrels a day new production since Jan 1 and a min of 500k more coming.
  • Peter on February 19 2018 said:
    Bravo, Mr. Trudeau.
  • StoneyWalker on February 19 2018 said:
    Finance Minister Morneau should step in and state the impact of the loss of near $117B in Canada's oil revenues in the past 7 years because of the lack of pipeline capacity . This revenue impairment has resulted in increased taxes, increased Canada's Debt, led to underfunded Social programs and will continue to raise debt financing costs for generations to come. Provinces who have opposed or are currently opposing Canada pipeline construction should be banned from importing foreign oil and be the first to lose equalization payments beginning immediately. Interprovincial trade obstruction should be treated as a form of terrorism, interfering with the safety and well being of the public!
  • Ness on February 19 2018 said:
    Peter
    Trudue has nothing to do with this. Canadian oil companies expanded production recklessly with no guarentee of pipeline capacity. The conservative govt had 10 years in power included 4 as a majority. Blame lies squarely on the ceos. Can you imagine if production was froze at 2017 levels. What that would mean for world oil prices and profits ? Instead they keep drilling and increasing on a daily basis. Trying to put the blame on someone else I find it funny how people like you blame Justin when this has been years in the making. Long before he was even in politics
  • Austin on February 20 2018 said:
    @ Ness
    No, it is not the CEOs fault. The pipeline was supposed to be built 10 years ago!!! In fact it finally got its stamp of approval a year and a half ago.

    Justin hasn't been helping. Rachel notley neither. Funny thing is, NOW they are trying to help (kind of) because they want votes.

    Ness, this is pure politics and has nothing to do with the good of the people. Absolute failure upon failure with the Canadian government. Very disappointing, and I am allowed to say this being a Canadian citizen since day 1. Only a few more years till we get new politicians who (hopefully) can get things done.
  • Brent Jatko on February 23 2018 said:
    Maybe they could buy/build more rail cars as a stopgap?
  • Richard Graham on March 01 2018 said:
    In what business fantasy world does increasing the supply of poor-quality crude, in a market flooded with much better product, lead to increased demand and higher prices?

    The market has spoken, WCS is priced lower than other crude because nobody wants to buy it.
    The same thing that happened to coal and nuclear power is now going to peel off the lowest quality crude from the market. This process will continue until crude is completely replaced by natural gas and renewables.
  • ninetyninepct on March 03 2018 said:
    Richard, the price for WCS is lower because that is what Canada's only customer says they will pay. Sales prices create taxes. The higher the price, the more taxes collected which means more funds available to support other technologies.

    We would all be interested in seeing your concept of wind-powered semi's.

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