Photo by THE CANADIAN PRESS An RBC report warns that Canadian oilsands producers face rising discounts for their products exported to the United States as growing production fills pipelines to capacity. An oil worker holds raw sand bitumen near Fort McMurray.

Oilsands price discounts expected to rise as output exceeds export pipeline room

CALGARY — Canadian oilsands producers face rising price discounts as growing production ”materially exceeds” export pipeline capacity to the United States in the first quarter of 2018, RBC Dominion Securities says in a new research report.

The report comes as the price differential between oilsands crude and its U.S. counterpart posted recently widened to more than US$25 because of recent events including reduced volumes on the Keystone pipeline system between Alberta and the U.S. Gulf Coast after a leak in South Dakota.

Production from the northern Alberta oilsands is set to climb by nearly 620,000 barrels per day over the next four years to 3.3 million bpd in 2021 before levelling off, it says.

About 75 per cent of the growth will be in raw bitumen — which must be blended with light petroleum products to flow in a pipeline, thus increasing volume by another 30 to 40 per cent.

“The oilsands are witnessing unprecedented growth that we now peg at roughly 250,000 barrels per day in 2017 and 315,000 bpd in 2018, before downshifting to roughly 180,000 bpd in 2019,” says the report from analyst Greg Pardy.

“This is a double-edged sword because Western Canada’s oil exports are set to materially exceed export pipeline capacity in the first quarter of 2018 — structurally widening Western Canadian Select spreads until new pipeline expansions move into place.”

The difference between WCS, a diluted bitumen crude, and West Texas Intermediate, a North American benchmark for conventional oil, will widen to average US$15.50 per barrel in 2018 and US$17.50 per barrel in 2019, the report says.

That’s $3.50 higher for both years than previous RBC forecasts. The average differential through the first 10 months of 2017 was US$11.86, versus US$13.71 through the same period of 2016, according to Alberta’s Energy ministry.

Stephen Kallir, an upstream analyst for Wood Mackenzie, said he agrees the average differential could be much higher than usual over the next few years.

“Whenever our producers aren’t getting the most value for their product it is a negative,” he said, adding the price outlook is part of the reason investment in new oilsands projects has dried up.

“If you look at what that downside case is on pricing if we don’t get new pipe, all of a sudden the economics get even more challenged because you’re looking at a differential that’s quite a bit bigger than what we consider historical norms.”

He pointed out that Enbridge Inc. (TSX:ENB) reported its oil export pipelines were fully spoken for earlier this week. Oilsands production next year is expected to grow mainly because of the ramp up of Suncor Energy Inc.’s (TSX:SU) 194,000-bpd Fort Hills mine and Canadian Natural Resources Ltd.’s (TSX:CNQ) 80,000-bpd Horizon mine expansion.

RBC said its wider forecast discount for WCS will be driven in part by increasing reliance on crude-by-rail shipments, adding it will cost producers an average of about US$4.50 per barrel more to use rail than shipping by pipeline.

It pointed out that Alberta’s railway loading capacity is about 620,000 bpd, leaving lots of room for growth.

The National Energy Board recently reported crude-by-rail exports of 134,000 bpd in September, up from 120,000 bpd in August and almost double the 69,000 bpd in September of 2016. The highest level in the past five years was 179,000 bpd in September 2014.

RBC said it estimates the U.S. Gulf Coast refining centre could accept another 1.8 million bpd of heavy oil from Canada if producers can get it there.

Pipeline congestion is expected to ease by 2020 if the 830,000-bpd Keystone XL and 590,000-bpd Trans Mountain Expansion are built and come on stream as their builders hope, RBC said. Both, however, face vocal opposition from environmental activists and local politicians.

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