Larry MacDougal/The Canadian Press
On Monday, the market said – loud and clear – we are heading into an oil glut.
The market did not say – in any way, shape or form – it is time to build another pipeline to get more Alberta bitumen to the British Columbia coast.
Investors knocked the stuffing out of oil sands producers such as Athabasca Oil Corp. ATH-T and Canadian Natural Resources Ltd. CNQ-T on Monday. The price of shares in both Calgary-based companies dropped more than 6 per cent as part of a broad decline in the domestic energy sector, triggered by the U.S. government’s capture of Venezuelan President Nicolás Maduro on Saturday.
Canadian energy companies didn’t sell off because Venezuela is about to begin pumping crude at levels not seen in more than two decades. Bitter experience in Iraq and Libya shows there’s rarely a straight line between deposing dictators and rebuilding the economies of the countries they ran.
Athabasca, Canadian Natural and other domestic producers sold off because investors are coming to grips with the fact that OPEC, Russia, the United States, Canada and maybe Venezuela are poised to produce just enough oil to keep prices in the US$50 to US$60-per-barrel range for the foreseeable future.
Opinion: Don’t expect a big gush of Venezuelan oil onto world markets any time soon
That’s a consumer-friendly outcome, one sure to please U.S. President Donald Trump. However, low oil prices undermine the economic case for another pipeline in B.C.
That didn’t stop Alberta Premier Danielle Smith from using the chaos in Venezuela, and the potential for increased shipments of its heavy oil to U.S. refineries at the expense of provincial producers, as a reason to repeat her call for a second pipeline, in addition to the federal government-owned Trans Mountain pipeline.
“Recent events surrounding Venezuelan dictator Nicolas Maduro emphasize the importance that we expedite the development of pipelines to diversify our oil export markets,” said Ms. Smith in a post on X.
What happened over the weekend in Venezuela complicates the Alberta government’s already complex analysis of pipeline economics by a group that includes three major operators – Enbridge Inc. ENB-T, South Bow Corp. SOBO-T and Trans Mountain Corp.
Over the next year, eliminating U.S. sanctions on Venezuela’s oil industry could increase exports by several hundred thousand barrels a day, according to RBC Capital Markets head of global energy research Greg Pardy. And that oil may go to U.S. refiners, rather than customers in China who built links to the Maduro regime.
However, what the U.S. military did over the weekend doesn’t ensure Venezuela regains its former stature as a major oil exporter, on par with Canada.
“Restoring the country’s production back toward the three million barrels-per-day range would require years of annual investment of some US$10-billion anchored by a stable security environment, both of which are tall orders,” said Mr. Pardy in a report.
Expanding the Trans Mountain pipeline has served Canadians well by narrowing the gap between the price domestic producers receive and world oil prices. Along with increased industry revenues, both the Alberta and federal governments are benefitting from higher royalties.
Canada needs new pipeline urgently to counter Venezuelan oil surge, Strathcona chair says
On Monday, analysts published worse-case scenarios that showed the discount on Alberta heavy oil price could increase, as U.S. refiners play off Canadian producers against Venezuelan rivals, who produce the same kind of oil. These rivals include U.S. companies such as Chevron Corp., which is still operating in the South American country.
Athabasca and Calgary-based Strathcona Resources Ltd. SCR-T are the domestic companies most exposed to any increase in the discount – the difference between the price fetched by West Texas Intermediate oil and heavier grades – on what American producers pay for Alberta oil.
However, it’s far from clear these worst-case scenarios will come to pass.
“The oil pundits may be getting way ahead of themselves,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia, in a report on Monday.
“Greater caution is required before leaping to their conclusions that this will unleash a torrent of new supply on world markets with effects that allegedly include snowing under Canada’s oil industry,” Mr. Holt said.
Plucking Mr. Maduro and his wife from their beds changed the political picture in Venezuela. It didn’t fundamentally change the economics of the energy market. Current oil prices reflect more supply than demand for crude.
There may be a business case for another oil pipeline from Alberta to the West Coast. What happened in Caracas over the weekend failed to make that case.