Despite a discount of more than US$20 a barrel between Canadian crude and WTI, drillers in Alberta are upbeat about the immediate future and plan to boost their drilling budgets, the Canadian Press reported recently, citing industry insiders.
"A lot of us spent a fair bit of our capex for the year in the first quarter, and before spring break in the second quarter, during that four-month period," one of these insiders, the chief executive of Bonterra Energy told the news outlet. George Fink added that more companies will up their spending further if WTI stays between US$68 and US$70 a barrel.
This upbeat attitude is probably a little surprising: even though Canadian crude rises when WTI rises, it is still trading at a deep discount to the U.S. benchmark (about US$24 a barrel at the time of writing) because of the severe pipeline shortage in Canada. Since the portion of crude that is refined locally is small, Canadian drillers are forced to sell their crude more cheaply than they would have liked. This, as common sense would suggest, is hurting their bottom line.
Yet, judging by the spending numbers that the Canadian Press quoted—50 percent of small drillers’ planned 2018 budget in the first half versus just 36 percent in H1 2016—the effect of the price discount is not as severe as one might imagine based on the pipeline shortage facts.
In fact, as far as small producers are concerned, it looks like the pipeline shortage is not a dramatic problem. Several small and mid-sized companies in Alberta have already declared that they will increase their capex by the end of the year because they expect higher cash flow on the back of improved prices. Some are raising dividend payouts and buying back shares. Many expect even stronger cash flows next year. In this context, the discount of Canadian crude to WTI does not seem like a huge deal somehow.
The fact that total Canadian oil production is growing supports this. The latest production figures from Statistics Canada reveal that the national total for oil and oil equivalents for May stood at 137.3 million barrels, a 13.5-percent increase on an annual basis. What’s more, the bulk of the increase came from higher bitumen production: it rose by 22.8 percent on the year in May. According to Statistics Canada, bitumen production is now close to capacity.
How does this fit with the pipeline shortage problem? Well, it seems the problem is not as big as some media reports are making it out to be. Yet it is a worsening problem because most forecasts see continued increases in Canadian crude oil production. At the same time, no new pipelines being built: the Canadian Court of Appeal recently overturned Ottawa’s approval of the controversial Trans Mountain expansion project, the only new pipeline project on the table in the country.
Now, the construction will be delayed by at least two years if Ottawa goes to the Supreme Court to seek an appeal of the ruling, and large producers such as Suncor have said they will curb new investment in the oil sands following the news. Meanwhile, a lot more oil will be transported by rail, which means longer pressure on producers profits since rail transport is costlier than pipelines. Is this cause for worry among Canadian drillers? Probably. But for now, smaller drillers at least can handle it.
By Irina Slav for Oilprice.com
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