The cost of oil from Alberta’s tar sands is trading near the cheapest relative to the New York benchmark in 17 months as refineries in the Midwest shut for maintenance and pipeline costs escalate.
Western Canada Select traded at a discount of $14.65 to West Texas Intermediate today, near the $18 gap on April 15 that was the widest since November 2008. Enbridge Inc. won approval for a 33 percent tariff increase to move oil via its pipeline to the Midwest, where the Energy Department said more than twice as much refinery capacity than usual is offline for maintenance.
The higher tolls will hurt Suncor Energy Inc. and Alberta’s oil sands producers, which will be forced to offer discounts to the refiners to remain competitive with oil available from the U.S. Gulf Coast.
“When you jack up the tolls by almost a buck a barrel, that means a buck a barrel less in the pockets of our producers,” said Vincent Lauerman, president of Geopolitics Central, an energy consultant in Calgary.
Enbridge operates its pipeline system under a common carrier agreement, where shippers nominate deliveries to the pipeline and charges increase if volumes decrease. Enbridge, based in Calgary, will collect about $180 million a year from its shippers regardless of the amount transported.
Canada is the U.S.’s biggest supplier, with imports surging 44 percent from 2000 to 2009 as tar-sands investment increased. The Midwest receives six out of every 10 barrels from Canada, which accounts for 35 percent of crude processed in the region.
Crude oil for June delivery rose 98 cents to $86.15 a barrel on the New York Mercantile Exchange today.
Planned and unplanned unit outages in the Midwest jumped to 426,200 barrels a day, or 11 percent of capacity, in April compared with 160,000 barrels a day in past years, according to Energy Department estimates.
Midwest refiners were processing about 3.3 million barrels a day at the start of the year, said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “Over the last month it’s been closer to 3 million. That’s probably indicative of all the turnarounds and the fact that margins have been poor.”
BP Plc’s 405,000 barrel-a-day plant in Whiting, Indiana, Marathon Oil Corp.’s 226,000 barrel-a-day Catlettsburg, Kentucky, refinery, and ConocoPhillips’ 306,000 barrel-a-day Wood River, Illinois, plant, are out on maintenance.
The discount of Canadian crude to WTI has narrowed from $18 on speculation demand will rise. About 300,000 barrels a day of refining capacity is due back on line around the end of April, Goldman Sachs Group Inc. analysts led by David Greely said April 20 in a report.
Supplies at Cushing, Oklahoma, the Midwest trading hub and delivery point for the New York contract, have swelled to 34.6 million barrels last week, the most since Jan. 1.
In other energy markets, Gulf Coast crudes have risen in value this month. The Mars Blend grade was $1.45 a barrel below the New York benchmark, from a $3.85 discount at the end of March.
The Canadian crude lost ground against foreign oils that can be imported and shipped to the Midwest in pipelines. WCS was $3.83 a barrel below Mexican Maya, from $1.44 March 31.
Shipping costs are rising as Enbridge and TransCanada Corp. add 885,000 barrels a day of pipelines this year, bringing the total capacity from Alberta to the Midwest to about 3.4 million, according to Chad Friess, an analyst at UBS Securities in Calgary.
Suncor asked the Federal Energy Regulatory Commission in January to delay higher pipeline tolls on Enbridge’s Alberta Clipper pipeline amid “dramatically changed circumstances” and a “surplus of oil pipeline capacity from Western Canada” into U.S. markets. The regulatory agency rejected the request.
Overcapacity may persist for years, even as oil-sands output rises. Western Canadian oil exports to the U.S. may reach 2.3 million barrels a day by 2013, according to a forecast from the Canadian Association of Petroleum Producers. About 4 million barrels a day of pipeline volume is expected to be available then, Friess said.
“We are going to see this excess in capacity until 2015, 2016,” said David McColl, research director at the Canadian Energy Research Institute. “That implies that the tolls, while they will slowly go down as the volume fills, won’t go down anytime soon.”
Sinclair Oil Corp., CVR Energy Inc., and National Cooperative Refinery Association, which operate four plants in the Midwest that process about 300,000 barrels a day, sued TransCanada over an increase in rates on its Keystone line in September 2009.
Estimated tolls for the pipeline under a 10-year contract have risen 145 percent for the Canadian portion of the line and 92 percent on the U.S. section, the companies said in court filings.
The increase in crude costs may hurt U.S. refiners that have signed long-term shipping contracts, said Randy Ollenberger, an analyst with the Bank of Montreal. Companies that aren’t locked into supply contracts may benefit, he said.
“Obviously there are a couple refiners here who are feeling they are on the hook for those pipeline tolls,” said Ollenberger. Others are “trying to be opportunistic,” he said.