The Crude Report: Covid-19 downturn not Canada's first rodeo

Author Argus

Covid-19 and its related demand destruction has challenged the Canadian oil sands sector with losses, but producers have been well-prepared for turbulence after overcoming previous challenges.

Brett Holmes, Reporter, discusses how producers have dealt with pipeline outages, forest fires and swelling inventories, and how larger producers look ready to capitalize on any recover in the back half of the year.

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Transcript

Alex: Hello and welcome to the Argus Crude Report, a podcast series on global crude oil markets. This is Alex Endress for Argus Media. I cover the US Gulf coast crude market for Argus, but today, we're talking about the Canadian oil sands sector.

Covid-19 and its related demand destruction has challenged the Canadian oil sands sector with steep losses, but producers have been well prepared for turbulence after overcoming previous challenges like pipeline outages, forest fires, and swelling inventories. Larger producers look ready to capitalize on any recovery in the back half of the year. Long-term, the sector's taller hurdle may be bridging the gap between oil sands and climate concerned investment. But here with me to chat about the Canadian oil sands is Brett Holmes, Argus crude reporter based in Calgary. Welcome, Brett.

Brett: Thanks, Alex.

Alex: So, Brett, could you describe the depth of the problems that these Canadian producers have faced as demand has sort of waned in the US?

Brett: Sure. So, Canadian oil sands companies have certainly not been immune to the downturn, and this is likely the worst on record. So, as economies around the world, as everyone knows, partially shut this year, refiners demand for crude globally took a serious hit. In Canada, a large part of production is exported primarily to the states. So, as refiners, they're backed off crude, Canadian producers had few options. First, they look for other buyers, but no luck there. They turned to storage, which filled, and subsequently, prices began to fall to record lows. Shut-ins were soon commonplace in Canada's oil patch as a result. Most shut-ins occurred in the second quarter and after sifting through the operating of financial results for that three-month period, it was not quite the bloodbath I was expecting. Sure, there were a lot of red ink used, but it was not as bad as the previous quarter. Prices have since rebounded to about $33 for community heavy crude at Hardesty Alberta and prices that low have actually never looked so good after bottoming out at just over $3/bl in April.

Alex: So, how does this demand valley compare to previous years? You know, as any listener who has followed Canada knows, this is not their first rodeo.

Brett: Indeed. So volatility remains a trademark of Canadian crude markets and past jolts in supply and demand have prepared Calgary-based companies to quickly stop the bleeding in this latest and surely deepest cut. The regional challenges of previous years have whipsawed local prices with dire results, and the industry has not ignored these past lessons. So, I counted at least four times in the past decade oil sands projects have been threatened by wildfires, for example, forcing several projects to shut in and evacuate staff. This has happened in 2011, 2015, 2016, and as recent as last year. In 2018, local prices collapsed when strong production was met by mystery and bottlenecks and upsets. Some producers called on the government of Alberta to enact provincial open limits and with some already reducing production, in fact. Others felt market prices should dictate output, but everyone is in the same boat essentially. And even those companies were still forced to pull leavers to stay within the newly imposed government limits. And we'll get to that a little bit later, potentially. So, fast forward in 2020, there was no government intervention required this time. Producers quickly wound down output by shutting the wells and battening down the hatches yet again. So, this is one of the few times actually in recent memory that a shock to the market was not a made in Canada jolt and the pain endured has not been unique to the Alberta oil sands.

Alex: Okay. So, we've got no government intervention this time around and the market seems to be left up to its own devices. How does some of these larger companies seem to be coping with these issues and just the current market fundamentals?

Brett: So, there is a bit of a mix for sure. Typically, a market shock is best navigated by an integrated player with both production and refining capacity. But this time it's a little different with both upstream and downstream getting hit quite hard. It seems producers who have the luxury of producing several grades and pulling on different leavers at different times have been fairing the best in the Canadian oil patch. And I believe this is a skill honed by several players during the government-mandated curtailment era, which still exists mind you. And on a high-level, producers with the ability to upgrade their bitumen into synthetic crude have fared better than a purely heavy crude producer. But it's all relative, of course, as virtually all grades touched records low this year. Synthetic production has largely been unfazed by the pandemic, steady at about 1.1mn b/d while the first five months of 2020, heavy crude from the oil sands plunged by about 500,000 bl to about 1.4mn b/d in May.

However, we have seen a bit of a recovery as prices have started to rebound, heavy crude has started to approach more normal levels in July. And just some companies-specific tidbits for listeners, CNRL Resources actually bumped up their synthetic crude production. This is while others, including CNRL, wound down a little bit of their heavy crude production, and Cenovus is a heavy crew producer and they wound down their crude by rail programs as arbitrage opportunities to the Gulf coast essentially evaporated with the flat prices compressing not only for crude by rail but also pipeline. And the plate of crude by rail could easily be an entire podcast of its own. Suncor, also one of the biggest producers in Canada, posted its lowest output in three years in the second quarter, as the saga continues at the Fort Hills joint venture with Total and Vancouver-based tech resources.

Alex: So, of course, we're in the midst of the Covid-19 pandemic right now, and its related demand destruction has caused issues all over, including in the oil sands, but beyond 2020 and the pandemic, what are the long-term issues that we should consider as we assess the oil sand sector and its future?

Brett: Right. So, obviously, balance sheets are getting chewed through in the oil sands right now because of the pandemic, but I don't think that's anything that's really unique to Canada necessarily or to the oil industry itself. The oil sands sector does face growing barriers to investment and financing. That is not a new thing, but it does crop up from time to time. Total this year said that their Ford Hills asset that I already mentioned could become stranded within 30 years. And they actually don't plan further investment in any capacity expansions there. We've seen foreign companies exit over the past six or seven years, but I think the Canadian energy industry has always kind of like insulted a little bit every time that happens. And the default reaction is to point to the unpredictable federal regulatory system that many can say frustrates project proponents. Canadian oil is also getting a kiss goodbye from some banks, HSBC, Deutsche Bank, and others have said they're blacklisting oil sands developers, because of the carbon intensity. Many in the Canadian energy industry say this is misguided, however. And this includes the Canadian Association of Petroleum Producers. The association says this will cause what they say, carbon leakage as countries with lower environmental standards fill the void in the oil production. So, this is a threat, nonetheless that all sands producers need to combat before it gets to critical mass and becomes a real problem.

Alex: Obviously, it'll be really interesting to see how the industry emerges from this time after the pandemic. And, you know, you would think that we would see some type of improvement all around, but I guess that remains to be seen. But Brett, thanks for your time, and thanks for your insight.

Brett: Thanks, Alex. My pleasure.

Alex: And listeners, if you're in need of more in-depth daily coverage of Canadian crude oil markets, consider subscribing to Argus Americas Crude. You can find more information on this service at www.argusmedia.com. Thanks for tuning in. And we look forward to you joining us on the next episode of The Crude Report.

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