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Is This The Next Disaster For Canadian Drillers?

Is This The Next Disaster For Canadian Drillers?

Oil infrastructure

The government of Alberta this week took an unprecedented decision to enforce a crude oil production cut so excess inventories could be shrunk and the price of western Canadian grades could improve, but the industry’s problems are far from over. They will be among the hardest hit by the International Maritime Organization’s new emission rules, to enter into effect in two years, which will require a reduction of the sulfur content of bunkering fuel to 0.5 percent from 3.5 percent.

“We’ve got challenges with respect to pipelines, we’ve got challenges with respect to rail and now we’ve got challenges with respect to our demand market,” Bloomberg quoted the chief executive officer of the Canadian Energy Research Institute as saying at a presentation this week. The emission rules will start affecting the price of Canadian crude next year, Allan Fogwill, along with other analysts, believes.

Canadian crude is heavy and sour, that is, high in sulfur content, which is the obvious reason why the IMO changes would affect prices, adding to already substantial pressure from pipeline bottlenecks and the rising amount of crude that is being transported by costlier rail.

According to IHS Markit analyst Kurt Barrow, the emission rules will make Canadian crude another $7-8 cheaper than West Texas Intermediate in 2019. Even the completion of the Line 3 replacement project won’t offset these losses, although it will add 375,000 bpd to daily pipeline capacity.

Another analyst, Wood Mackenzie research director Mark Oberstoetter, told Bloomberg Western Canadian Select will likely be US$20 cheaper than WTI for most of 2019, which is the cost of railway transportation for Albertan heavy crude. All in all, things are looking pretty bad. But how bad is bad?

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