Supply Chain Logjam Affecting Canadian Oil Producers

Supply Chain Logjam Affecting Canadian Oil Producers


The long oversupplied global crude oil market is witnessing the strongest price surge in recent years, with Brent crude, the international oil price benchmark, trading at prices up by nearly 40 percent since June 2017. This hike in the value of oil is predominantly being driven by the increasing global demand and complemented with production cuts by Russia and the OPEC cartel. Although the world’s leading oil producers are enjoying this price rise, Canada’s premier oil companies — Imperial Oil, Suncor Energy and Cenovus Energy — are being deprived of their fair share in today’s blooming market. While Canada’s oil sands continue to pump out oil at a proactive rate, Canadian producers are missing out on the price rally. Western Canadian Select, Canada’s oil benchmark, is trading at a discount of close to $20 against its equivalent in the U.S., West Texas Intermediate. This difference in value is a result of the bottleneck effect: extra supply but limited transportation capacity to export their produce to the market.

Athabasca oil sands in Alberta produce almost 1.3 million barrels per day, nearly all of which are exported via pipelines to the U.S. Approximately 43 percent of America’s oil imports are supplied by Canada, making it the country’s single largest source of crude oil. However, with pipelines operating at maximum capacity, Canadian exporters are only left with the option of shipping their crude via railroads.

Impact on Transportation

Transportation of crude oil to the U.S. through pipelines is the primary mode of shipping engaged by Canadian producers. Pipeline construction is a slow and expensive process, and given the environmental risks, it has largely become a controversial issue in Canada. One of the major arteries connecting Canadian oil to the U.S. Gulf Coast, the TransCanada Corporation-owned Keystone Pipeline — which is capable of shipping 830,000 barrels of oil a day — suffered a major oil spill in November 2017 that resulted in the leakage of nearly 210,000 gallons of crude. TransCanada also nixed its plans to build two pipeline projects in Eastern Canada due to unforgiving regulatory restrictions. Another pipeline operator, Kinder Morgan Canada Ltd., is facing strong opposition by environmentalists for the construction of Trans Mountain Pipeline through British Columbia.

The lack of pipeline capacity has forced oil producers to consider shipping the crude south via railroads. Crude oil transport via rail rose by nearly 58 percent year-on-year in 2017. However, as shipping crude by rail is a relatively expensive affair, producers are looking to acquire short-term deals (less than a year), something that rail operators such as Canadian Pacific and Canadian National Railway Company are averse to engage in. Five years ago, rail companies spent millions of dollars to build loading terminals that would cater to the increased demand for transportation because of a similar price surge. However, business dropped drastically when oil prices tumbled and more pipeline capacity came online. Hence, rail companies are wary of ramping up their supply this time around, as they fear that companies will stock rail cars for now and then quickly shift to pipelines when additional capacity comes online over the next few years. Canadian rail terminal operators, which are the bridge between oil producers and railroad companies, are also feeling the heat, as available rail capacity is almost 50 percent below what producers are demanding.

While the effects of oil production cuts by OPEC and Russia are getting undermined by increased U.S. shale production, the global market is still forecast to be undersupplied by nearly 430,000 barrels per day in 2018. It remains to be seen how Canada’s producers strategize to overcome the supply chain blockade to capitalize on the rising crude prices.   


Add Comment +

Leave a Comment

Your email address will not be published. Required fields are marked *