What country produces one of the world’s lowest-priced crude oils? Right now, it’s Canada, and by a substantial margin.
The price of Western Canada Select (WCS), a heavy-sour blend of crude oil that includes bitumen from the Alberta’s tar sands, traditionally has traded at a discount to light-sweet West Texas Intermediate (WTI).
However, this differential has widened to more than US$30.00 per barrel, as insufficient takeaway capacity and growing production from Canada’s oil sands and shale plays have made WCS extremely vulnerable to pipeline and refinery outages. And until new pipeline capacity to the US and Canada’s East Coast comes onstream, Canadian producers will be forced to transport their crude-oil volumes to market via rail and truck–options that usually entail higher shipping costs.
Up until earlier this year, WTI itself traded at historically wide discounts to Brent crude oil, a benchmark that better reflects global supply and demand conditions. An upsurge in crude-oil production from the North Dakota’s Bakken Shale and other unconventional plays combined with a lack of southbound pipeline capacity from the delivery hub in Cushing, Okla., to depress the price of WTI temporarily.
These wide differentials incentivized midstream operators to develop a solution.
The reversal and expansion of Enbridge (TSX: ENB, NYSE: ENB) and Enterprise Products Partners LP’s (NYSE: EPD) Seaway Pipeline helped to alleviate the localize gut of crude oil that had depressed the price of WTI relative to Brent crude oil. The joint-venture partners plan to expand the pipeline even further to meet customer demand.
Meanwhile, a second major artery, the southern leg of TransCanada Corp’s (TSX: TRP, NYSE: TRP) controversial Keystone XL pipeline will come onstream later this month and provide additional takeaway capacity from Cushing to the refinery complex on the Gulf Coast.
Investors suffering through the gut-wrenching volatility in the prices of WCS and other Canadian crude oils should view the closing of the WTI-Brent price gap as a reminder that stability eventually will come.
Enbridge and TransCanada, as well as Kinder Morgan Energy Partners LP (NYSE: KMP) and Spectra Energy Corp (NYSE: SE), have major projects on the drawing board to move oil from Canada’s interior to the coasts and world markets. All these endeavors will take time to bring to fruition.
TransCanada, for example, won’t file for regulatory approval of its Energy East Pipeline with Canada’s National Energy Board until the firm completes additional environmental work. This decision likely postpones the groundbreaking on this 4,500-kilometer pipeline until 2014, at the earliest. The proposed pipeline will ship up to 1.1 million barrels of crude oil per day from Alberta to Canada’s East Coast.
TransCanada’s management team continues to estimate that the northern leg of the Keystone XL will require two years for construction–once the US State Dept gives the firm the project the green light. The company has already spent at least US$1.9 billion of this segment’s projected US$5.3 billion total cost; these investments, coupled with the support of Prime Minister Stephen Harper, suggest that the Canadians won’t walk away willingly. But all bets are off in Washington.
Until these and other proposed pipelines are up and running, Canadian producers will need to rely on rails, trucks and barges to ship their output to end-markets. In short, WCS-WTI price differentials likely will remain volatile for the next several years.
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Elliott and Roger on Jan. 29, 2019
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