Last Wednesday’s announcement by Cenovus Energy that it is cutting back its tar sands/oil sands production is a “remarkable” moment that shows how fossils “could act rationally to wind down production in the face of the urgent need to keep carbon in the ground,” according to an analysis by Oil Change International.
The announcement was also “a small but concrete demonstration of the link between new transportation infrastructure like pipelines and climate pollution,” writes OCI Senior Campaigner Adam Scott.
The news coverage last week attributed the discount fossil producers have to offer international customers strictly to limited pipeline capacity—the mantra Canadians have been hearing from the fossil industry for years. Scott’s analysis is rather more complete.
“In recent months, Alberta oil producers have faced an unprecedented drop in the price they are able to get for their oil,” he writes. “Tar sands oil has always been worth less than conventional crude as a result of its lower quality and the expense of shipping it to distant markets, but the discount is now also being driven by refinery outages and an increasingly full export pipeline system.”
The combination of those baked-in disadvantages has driven the discount on Western Canada Select (WCS) crude above US$50 per barrel compared to the North American benchmark price, West Texas Intermediate (WTI), Scott states. “That means some tar sands producers are selling oil for less than $20 per barrel, losing large amounts of money at a time when global oil prices have been trending upwards.”
So Cenovus is curtailing its own production and not-so-collegially urging other fossil producers to do the same.
Fossils’ reaction to the price spread—with Cenovus and then Canadian Natural Resources Ltd. (CNRL) cutting back, Suncor Energy saying it won’t build new facilities without pipeline access, and pressure building for the Alberta government to forego even the measly production royalties it receives as a short-term fix—shows that “without new pipelines, expanding production just isn’t financially viable,” Scott writes. In their tireless advocacy for five new export pipelines in recent years, “companies argued that oil would flow regardless of how many pipelines were built and, therefore, emissions from each project would be minimal. Thanks to fierce resistance from a connected movement standing up to uphold Indigenous rights and protect water, land, and the climate, none of these projects has moved forward.”
But Suncor, Cenovus, and CNRL still pushed major new tar sands/oil sands projects ahead, building business strategies on the unproven hope that pipelines would be built, U.S. customers would want their product despite massive volumes of cheaper shale oil, and climate action would not coalesce. “Competing with each other to produce as many barrels as possible has undermined the sector,” Scott argues. “In the face of this self-imposed crisis, collective action to negotiate and manage production declines could provide a viable path forward.”
So last week, Cenovus announced production cuts Wednesday, with CEO Alex Pourbaix stressing the company had made the move in the best interest of shareholders, “not for charity”.
“We’re not going to carry the industry on our backs,” he told a quarterly earnings call. “We’re going to do this as long as we can justify that we’re creating value for our shareholders…It’s the right thing for our company, and hopefully other players would have a similar view.”
CNRL followed Thursday with word that it had already curtailed its output of tar sands/oil sands crude by 15,000 barrels per day. “Due to widening price differentials driven by market access restrictions, the company made the pro-active and strategic decision to shut in, curtail, and reduce activity on heavy crude oil production,” CNRL said in a release.
CBC is predicting that industry’s price conundrum—or, as Scott says, its “self-imposed crisis”—will persist for some time.
“The refineries will begin operating again shortly, but prices may take much longer to recover because of how much oil is produced and in storage in Alberta and how little space is available to export the crude,” the national broadcaster states. “Industry experts now expect low prices for Canadian heavy crude could persist into 2020.”
At nearly 230,000 barrels per day, analyst Jon Morrison of CIBC World Markets told a recent conference that oil by rail deliveries would have to reach 500,000 barrels by year’s end to shift prices. Bloomberg reported last week that desperate producers are even turning to highway trucks to get their product to market.
Even with oil by rail expected to peak this year at 400,000 barrels per day, “that still leaves you with too much crude,” Morrison said. “Prices collapse until producers shut in production to balance supply and demand.”