Is A Crisis Looming For Canadian Oil?

By Irina Slav

Canadian Oil

Earlier this month when pipeline operator Enbridge said its Line 3 pipeline will only return to operation in the second half of 2020, it was very bad news for Alberta. Producers in Alberta will have been hoping to start boosting production again once the government-instituted cuts expired at the end of this year. That would have happened if Line 3 had resumed operation as initially scheduled, at the end of 2019. The delay to 2020 could be very damaging for Canada’s oil industry.

Enbridge said in early March it had received from the state of Minnesota a timeline for collecting all necessary permits for the replacement of the pipeline. This timeline, however, was longer than the company had banked on, moving the restart date of Line 3 to some time after June 2020. The new, expanded Line 3 will have a capacity of 370,000 bpd.

When Alberta’s Premier Rachel Notley announced production cuts in December, plans were to start these at 325,000 bpd in January, then for them to be reduced to 95,000 bpd until the end of the year. But that was the assuming that Line 3 and its 370,000 bpd were in operation by that date. Now, some are worrying the cuts will be extended because the much-needed additional pipeline capacity won’t be available.

And this is not the only bad news for the Alberta oil industry. Reuters reported this week, citing an investment industry insider, that traders are shunning long-term crude oil contracts for Canadian crude because of the uncertainty surrounding production in the short term—uncertainty heightened considerably by Enbridge’s Line 3 announcement

“Everything we heard from the government was that they were 100 percent relying on Line 3 coming into service at the end of 2019,” Tim Pickering from Auspice Capital Advisors told Reuters. “That (delay) is definitely something that may have them responding as the market changes.”

This is a problem for the industry because the only way producers can lock in forward oil prices is through contracts for later delivery. With that option reduced, both producers and refiners in Canada and the United States have become more vulnerable to unfavorable price swings.

What’s more, traders are suspicious of the Albertan government: according to industry sources that Reuters spoke to, Gulf Coast refiners are staying away from forward contracts for Canadian crude as they don’t know if the government won’t decide to interfere again in the industry.

“I won’t take any forward positions in Canada right now. Everyone is wondering what the government is going to do … one announcement can ruin your year,” one of the sources said.

Making the situation additionally complicated is the fact that Albertans will be voting for a new government in a couple of months and the incumbent NDP Premier is behind her rival from the United Conservative Party. In fact, a recent poll forecast a change in government in the province and a change of government always involves a higher-than-usual amount of uncertainty for the oil industry.

The decision to institute production cuts is beginning to look bad in hindsight, even though Notley’s government did not exactly have many options to prop up prices that had dived to a discount of over US$50 per barrel to WTI at one point in 2018. With the Line 3 delay, chances are that a lot more oil will leave Alberta by train and producers will likely just have to suck it up and outwait the delay.

By Irina Slav for Oilprice.com

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