Western Canada鈥檚 oil industry has gone way beyond a crisis, and the situation can only be fixed by building more pipelines and allowing oil to be shipped to more customers than just the United States.
This is the point of view of Weyburn oilman Dan Cugnet of Valleyview Petroleum, in an extensive interview about the state of affairs that includes a huge differential between the price for oil produced in the West and the West Texas Intermediate (WTI) price, and its effect on southeast oil companies.
Asked why there is such a wide gap in prices for oil, Cugnet explained, 鈥淭he differential is so wide because we have restricted our market access through an incredibly damaging domestic policy. Quite simply, we can鈥檛 access tidewater with our oil and that means we can鈥檛 access any markets. Rather than providing access to eastern Canada or port access to serve Asian, European and other overseas markets, we continue to move the majority of our oil south.聽The U.S. is now exporting oil due to the abundance of light crude they have and the blended feedstock refineries there require a lower grade of crude.聽As a result, the Americans can dictate the price point to us if we want to sell to them.鈥�
Western Canadian oil producers don鈥檛 have a choice but to sell to American buyers, because of the lack of pipelines to move the oil, he said.
鈥淭hey鈥檙e happy to steal it at a discount right now and our Federal government and the different activists veiled under the climate change movement seem happy to let them ruin the finances of this country. It would be like any other business only having one customer.聽One customer means they dictate the price. The crude trading business is an ongoing auction.聽In this case it鈥檚 an auction with one bidder,鈥� said Cugnet, noting this is basically handing the monopoly to the U.S., which would be disastrous for any commodity being shipped for export.
Cugnet pointed out that the differential is not just affecting the heavy crude produced in the Fort McMurray or Lloydminster areas.
鈥淎ll levels of crude are currently affected by differentials.聽In fact, North Dakota Bakken, due to its distance from Texas, is trading for less than Sask. Bakken right now, and the Americans are trucking it up to Canada to recover some of those losses and further displacing more Canadian barrels,鈥� he said, giving a local example of how this is affecting producers.
鈥淣ow we have TEML shutting in batteries as well in the area, which is unheard of.聽I don鈥檛 know when this is going to start ringing alarm bells in Saskatchewan and Canada, but it should. Every week this situation has more problems piled on to the existing ones,鈥� he said. 鈥淗ow do you fix it? Pipelines, pipelines, pipelines.鈥�
Asked about some of the factors affecting the price of oil, Cugnet said, 鈥淕lobal headwinds are supply driven right now. The biggest single factor in this crash the last month was the Iranian barrels that were supposed be sanctioned and off the market. (U.S. President) Trump pulled an about face and relaxed and granted exemptions on a lot of those barrels that were supposed to be off the market. Now Trump has turned that on its head and is cratering their economies and the U.S. economy keeps rocking with cheap oil.鈥�
He noted that this move is hurting the Saudis and Russians while simultaneously helping the U.S. economy, and 鈥渢he market over-reacts as it always does to these things.聽These stocks are getting hammered and if you actually look at the metrics of each they should be trading at three to four times what they are right now.聽Coupled with global trade uncertainty right now and the 鈥榩erception鈥� of a supply overhang, aggressive trading has driven the price down.鈥�
Globally oil consumption increases between 1.2 to 1.7 million barrels more per day each year, noted Cugnet, and demand has stayed on that trajectory for a decade now. 聽
鈥淲e鈥檙e right on the threshold of a whipsaw in the other direction again with price. That鈥檚 a massive increase each year and now a massive decrease in price in the last month.聽It鈥檚 tough to say if that swing back up will happen in the next three months now or is another year away, but this latest move has definitely halted oil鈥檚 climb up and erased any gains or optimism that had been starting to grow amongst producers or the service industry,鈥� said Cugnet, adding this is not the turn-around that producers have been hoping for.
鈥淢y head was in a totally different place with this two months ago with the sanctions looming and now I鈥檝e reversed course and I鈥檓 back into hunker-down mode for at least the first two quarters of 2019 due to these moves by the U.S.聽The only saving grace for most producers was good hedging for 2019 but most have too much exposure to the differential being unhedged. That鈥檚 the same thing that has led to less activity in 2018. That differential and the hedge price means the realized prices for most E & P companies has been far less than the spot price of WTI. That looks to continue.鈥�
Some industry representatives, such as Tim McMillan of the Canadian Association of Petroleum Producers, have called the current situation a 鈥渃risis鈥�, but Cugnet is suggesting that it鈥檚 moved far beyond that.
鈥淚t鈥檚 beyond a crisis at this point, ask anyone who鈥檚 unemployed or their business no longer exists, and they鈥檇 probably use the word catastrophe,鈥� said Cugnet.
鈥淟ook at how many private drilling companies there are in southeast Saskatchewan compared to two years ago. Mergers and acquisitions continue as many of these companies can no longer remain solvent,鈥� he added, saying of CAPP, 鈥淭hey have been a lobby group for a couple mining companies for a long time.聽Oil sands and conventional oil are not the same industry.聽They have the same end product but completely different ways of getting there.聽This mess in Alberta was endorsed by those big oilsands companies standing up in front of a camera and trying to play along to the idea of social license.聽Now half of those same companies have exited Canada entirely, and you have guys like Steve Williams of Suncor whining about the state of things.鈥�
Asked where the price of oil should be to be at a healthy level for oil companies, Cugnet replied, 鈥淭he spot price of oil hasn鈥檛 been the problem. It鈥檚 been right where it needs to be for the global economy to be strong and vibrant.聽$55-$75 a barrel is good for industry, government, manufacturing and most end consumers.
