Clogged pipelines cut Canada's oil price, small producers shift strategy

Gear Energy

04/10/2018 12:00

By Rod Nickel
    WINNIPEG, Manitoba, Oct 4 (Reuters) - Small Canadian oil
producers are striking complex deals with refineries,
diversifying production and seeking marketing help as they try
to soften the blow from record price discounts on heavy crude
generated by pipeline congestion.
    Unlike integrated companies Suncor Energy  SU.TO  and
Imperial Oil  IMO.TO  that have refineries to process their own
oil, reserved pipeline space, storage, and marketing
departments, small producers scrape by with less.
    That reality is spurring companies such as Pengrowth Energy
Corp  PGF.TO , Athabasca Oil Corp  ATH.TO , and Gear Energy Ltd
 GXE.TO  to find new strategies.
    Canadian heavy crude sells for less than half the price of
the U.S. benchmark, West Texas Intermediate (WTI) light oil,
with the differential reaching the widest level ever on Friday,
according to Shorcan Energy Brokers. The price for light oil is
also under pressure. 
    Being small especially hurts when barrels are rejected by
pipeline companies that do not have capacity to move all the
crude produced, called apportionment. Small producers are then
forced into finding new last-minute buyers, shaving a further $5
to $10 per barrel off already deeply discounted prices, said Rob
Morgan, chief executive of private heavy oil producer Cona
Resources.
    "The small to mid-size companies are going to have to step
up their game," said Jihad Traya, Calgary-based manager of
strategic energy advisory services at HSB Solomon Associates.
"What it comes down to now is, how clever can you be?"
    Fourteen percent of Western Canadian crude in 2017 was
produced by companies with output of 50,000 boepd or less, not
including private companies, according to a Canadian Energy
Research Institute calculation using CanOils data. 
    A vibrant junior sector is critical for the role it plays
exploring boundaries of hydrocarbon pools, said Mark
Oberstoetter, director of upstream research at consultancy Wood
Mackenzie. 
    While the differentials hurt, they are based off rising WTI
prices, which has allowed some small producers to stay
profitable, he said.
    More small Canadian oil producers are making sales to
refineries that lock in a fixed price for the differential,
allowing them to limit risk, Traya said. U.S. refiners, who
benefit from the big discount, get to lock in supplies
long-term.
    Pengrowth agreed to sell most of its 2018 crude production,
17,000 barrels per day, and 40 percent of next year's output,
10,000 bpd, to two U.S. refineries at a fixed differential.
Pengrowth also gains access to the refineries' pipeline space.
    The company is now trying to lock in more of its 2019 and
2020 production on that basis, said Pengrowth CEO Pete Sametz.
    "It's apportionment protection." 
    Athabasca is also mitigating the impact of apportionment
through contracts with refineries that involve pipeline space,
CEO Rob Broen said in a presentation.
    For some small producers, outside marketing expertise is
more important than ever. 
    Phoenix Energy Marketing has doubled the volume of crude it
markets in the past three years, to 50,000 barrels per day, said
president Dave Maffitt.
    "You know you're going to take a haircut on price. It's just
minimizing the haircut and being knowledgeable enough about what
the alternatives might be," Maffitt said.
    But not all strategies are successful, and many refiners are
hesitant to lock in differentials when the widening trend boosts
their margins, said a Canadian industry source.
    "The best barrel (to buy) is the distressed barrel," he
said.
    One fixed-differential deal collapsed between a U.S. East
Coast refiner and Canadian producer due to restrictions on
older, widely used rail cars, a source at the refiner said,
showing that there is no easy way around transport bottlenecks.
    To diversify from selling heavy crude, Gear Energy announced
in July it would buy light oil assets in Saskatchewan. Since
announcing the deal, however, the light oil discount has risen
sharply.
    Gear is now likely to cut capital spending, said Chief
Financial Officer David Hwang.

 (Additional reporting by Devika Krishna Kumar in New York;
Editing by David Gregorio)
 ((rod.nickel@tr.com; 1-204-230-6043; Reuters Messaging:
Twitter: @RodNickel_Rtrs))