Western Canada’s oil industry has gone way beyond a crisis, and the situation can only be fixed by building more pipelines and allowing oil to be shipped to more customers than just the United States.
This is the point of view of Weyburn oilman Dan Cugnet of Valleyview Petroleum, in an extensive interview about the state of affairs that includes a huge differential between the price for oil produced in the West and the West Texas Intermediate (WTI) price, and its effect on southeast oil companies.
Asked why there is such a wide gap in prices for oil, Cugnet explained, “The differential is so wide because we have restricted our market access through an incredibly damaging domestic policy. Quite simply, we can’t access tidewater with our oil and that means we can’t access any markets. Rather than providing access to eastern Canada or port access to serve Asian, European and other overseas markets, we continue to move the majority of our oil south. The U.S. is now exporting oil due to the abundance of light crude they have and the blended feedstock refineries there require a lower grade of crude. As a result, the Americans can dictate the price point to us if we want to sell to them.”
Western Canadian oil producers don’t have a choice but to sell to American buyers, because of the lack of pipelines to move the oil, he said.
“They’re happy to steal it at a discount right now and our Federal government and the different activists veiled under the climate change movement seem happy to let them ruin the finances of this country. It would be like any other business only having one customer. One customer means they dictate the price. The crude trading business is an ongoing auction. In this case it’s an auction with one bidder,” said Cugnet, noting this is basically handing the monopoly to the U.S., which would be disastrous for any commodity being shipped for export.
Cugnet pointed out that the differential is not just affecting the heavy crude produced in the Fort McMurray or Lloydminster areas.
“All levels of crude are currently affected by differentials. In fact, North Dakota Bakken, due to its distance from Texas, is trading for less than Sask. Bakken right now, and the Americans are trucking it up to Canada to recover some of those losses and further displacing more Canadian barrels,” he said, giving a local example of how this is affecting producers.
“Now we have TEML shutting in batteries as well in the area, which is unheard of. I don’t know when this is going to start ringing alarm bells in Saskatchewan and Canada, but it should. Every week this situation has more problems piled on to the existing ones,” he said. “How do you fix it? Pipelines, pipelines, pipelines.”
Asked about some of the factors affecting the price of oil, Cugnet said, “Global headwinds are supply driven right now. The biggest single factor in this crash the last month was the Iranian barrels that were supposed be sanctioned and off the market. (U.S. President) Trump pulled an about face and relaxed and granted exemptions on a lot of those barrels that were supposed to be off the market. Now Trump has turned that on its head and is cratering their economies and the U.S. economy keeps rocking with cheap oil.”
He noted that this move is hurting the Saudis and Russians while simultaneously helping the U.S. economy, and “the market over-reacts as it always does to these things. These stocks are getting hammered and if you actually look at the metrics of each they should be trading at three to four times what they are right now. Coupled with global trade uncertainty right now and the ‘perception’ of a supply overhang, aggressive trading has driven the price down.”
Globally oil consumption increases between 1.2 to 1.7 million barrels more per day each year, noted Cugnet, and demand has stayed on that trajectory for a decade now.
“We’re right on the threshold of a whipsaw in the other direction again with price. That’s a massive increase each year and now a massive decrease in price in the last month. It’s tough to say if that swing back up will happen in the next three months now or is another year away, but this latest move has definitely halted oil’s climb up and erased any gains or optimism that had been starting to grow amongst producers or the service industry,” said Cugnet, adding this is not the turn-around that producers have been hoping for.
“My head was in a totally different place with this two months ago with the sanctions looming and now I’ve reversed course and I’m back into hunker-down mode for at least the first two quarters of 2019 due to these moves by the U.S. The only saving grace for most producers was good hedging for 2019 but most have too much exposure to the differential being unhedged. That’s the same thing that has led to less activity in 2018. That differential and the hedge price means the realized prices for most E & P companies has been far less than the spot price of WTI. That looks to continue.”
Some industry representatives, such as Tim McMillan of the Canadian Association of Petroleum Producers, have called the current situation a “crisis”, but Cugnet is suggesting that it’s moved far beyond that.
“It’s beyond a crisis at this point, ask anyone who’s unemployed or their business no longer exists, and they’d probably use the word catastrophe,” said Cugnet.
“Look at how many private drilling companies there are in southeast Saskatchewan compared to two years ago. Mergers and acquisitions continue as many of these companies can no longer remain solvent,” he added, saying of CAPP, “They have been a lobby group for a couple mining companies for a long time. Oil sands and conventional oil are not the same industry. They have the same end product but completely different ways of getting there. This mess in Alberta was endorsed by those big oilsands companies standing up in front of a camera and trying to play along to the idea of social license. Now half of those same companies have exited Canada entirely, and you have guys like Steve Williams of Suncor whining about the state of things.”
Asked where the price of oil should be to be at a healthy level for oil companies, Cugnet replied, “The spot price of oil hasn’t been the problem. It’s been right where it needs to be for the global economy to be strong and vibrant. $55-$75 a barrel is good for industry, government, manufacturing and most end consumers.