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Pipeline constraints, refinery turnarounds spark Canadian heavy crude plunge

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Pipeline constraints, refinery turnarounds spark Canadian heavy crude plunge

A spate of refinery turnarounds and a chronically bottlenecked pipeline system sent prices for Canadian-produced crude tumbling, leading to speculation that some companies could start to slow output.

Western Canadian Select, the benchmark oil sands bitumen blend, closed at C$33.48, or about US$25.77, per barrel Oct. 15, according to data compiled by the Petroleum Services Association of Canada, while West Texas Intermediate crude traded at Cushing, Okla., closed at US$71.78/bbl. Condensate, ultralight oil associated with natural gas production that is used to thin bitumen for pipeline shipping, was trading for C$81.86/bbl in Edmonton, Alberta. Bitumen produced from wells can require more than 30% condensate for mixing to make it flow. That could lead to losses for some producers, according to analysts at Tudor Pickering Holt & Co.

Large producers like Suncor Energy Inc., Canadian Natural Resources Ltd. and Exxon Mobil Corp.'s Canadian unit mine bitumen from open pits in northeastern Alberta, a process that requires less condensate for shipping. Those companies, along with Husky Energy Inc., also operate upgraders, plants that process raw bitumen into refinery-ready crude. Most of the large companies have benefited by cheaper crude because they operate their own refineries and then sell gasoline to consumers at retail prices. Unleaded gasoline averaged US$4.75 per gallon across Canada as of Oct. 16, according to analyst GasBuddy.com.

Conventional heavy oil wells and not oil sands production facilities are the most likely to be shuttered until things improve, the Tudor Pickering Holt analysts said in an Oct. 15 note. "We see these wells, producing [less than] 25 bbl/d, as the barrels most likely to consider the shut-in conversation," the analysts said.

Canada's exports of heavy crude oil rose to 2.73 MMbbl/d in July from 2.53 MMbbl/d in July 2017, according to National Energy Board statistics. The increase is the result of oil sands projects that were started earlier in the decade in expectation that pipeline expansion projects would be in service by now. Of three major pipeline expansions in the works, only Enbridge Inc.'s Line 3 expansion is under construction, with an estimated in-service date in late 2019. That project could be delayed as Native American and environmental groups in Minnesota are planning a court appeal of its approval.

A heavy turnaround season the U.S. Midwest has also dealt a blow to heavy oil prices. In July, medium and heavy crude exports to the PADII region were 1.88 MMbbl/d, where specialized refineries are capable of processing the tar-like oil. An estimated 829,000 bbl/d of refinery capacity is expected to be offline in October to prepare for conversion to winter fuel production. Canada's lack of pipeline capacity limits the ability of producers to reach other markets, although some, like Cenovus Energy Inc., have signed contracts to increase shipping of crude by rail.

"Western Canadian Select trades at a US$43 discount to [West Texas Intermediate]," independent energy analyst Laird Dyer said Oct. 9 at a conference in Los Angeles. "That's the bill Canada is paying for an inability to build pipeline infrastructure."