Canada’s oil sands producers are likely to report lower second-quarter profits, but they are hoping that improved government support will boost their prospects for investment to diversify away from dependence on US demand.
Price differentials for both heavy sour crudes in the Canadian market were robust during the second quarter, but that only partly offset declines in US benchmark WTI. The hit to output — which strengthened differentials — was pronounced as wildfires forced several of the largest oil sands operators to shut in production. Heavy sour Western Canadian Select (WCS) at Hardisty, Alberta, narrowed its discount to WTI to its tightest since 2020, at about $10.25/bl in the second quarter, according to Argus data. But lower outright prices will overshadow this strength.
WCS averaged about $54/bl in the second quarter, down by 25pc from $67/bl a year earlier. And the US-Canadian dollar exchange rate shifted to producers’ detriment over the period, having partially insulated them from lower prices in the prior two quarters. Lower output will weigh on results for Cenovus, Canadian Natural Resources and MEG Energy, which all had to cut production in late May owing to nearby wildfires. A combined 344,000 b/d of bitumen — representing 500,000 b/d of marketable crude when combined with diluent — were shut in for a week.
Still, Canadian oil sands companies have proven to be resilient — their growth and capital plans would remain intact even if WTI prices were to fall to $45/bl or lower, the producers say — a claim that cannot be made in every basin. And looking further ahead, Canada’s producers have cause for optimism because of a new tone and perspective on oil and gas from the federal government. Alberta’s crude export egress congestion looks set to return in the coming years. Regulatory certainty to build more pipelines is what will really be required to lure investors back to Canada and drive the GDP growth prime minister Mark Carney desires.
A new federal major projects office will be open by 1 September, Carney announced on 22 July, providing a one-stop shop for reviews that will aim to approve or deny applications within two years. This is welcome news for oil producers seeking more export capacity, and while a few routes are being contemplated, both Carney and Alberta premier Danielle Smith have discussed the need for a 1mn b/d bitumen pipeline to northwest British Columbia.
Ready to talk
British Columbia premier David Eby seems open to the idea of a new pipeline, but laments that it has been a distraction. “A lot of the discussion is around this project that does not currently have a proponent,” Eby says. There are “north of C$50bn ($37bn) worth of projects” in the province, with some awaiting support from the federal government, Eby says. “When premier Smith and the prime minister are in position with a proponent, we’re absolutely willing to have those conversations with them,” he says.
Both Smith and Eby have highlighted their common ground on ammonia exports, interconnecting electricity systems and expanding the capacity of the 890,000 b/d Trans Mountain pipeline system. These are among the ideas put forward to beef up Canada’s industrial capacity to diversify its trade partners, against a background of ongoing negotiations with an unpredictable US administration. US president Donald Trump is threatening Canada with more tariffs should the two sides not reach a deal by 1 August, but the US may have already moved off that date. “What we’re hearing from the Americans is it looks like they’re putting off a full renegotiation of the Canada-US free trade agreement until next year,” Smith says. “The objective is not to have an agreement at any cost,” Carney says. “Our phone is ringing off the hook from other countries who want to do more with Canada.”