Why Canada was the first to jump on OPEC+ wagon

Why Canada was the first to jump on OPEC+ wagon

Edmonton's petrochemical refineries process much of the oil sand produced by the Fort McMurray, Alberta open pit mines of Canada. (Shutterstock)
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The first non-OPEC large producer open to joining any potential global oil output cuts with OPEC+ to reduce the huge surplus in the oil market was Canada, the home of the world’s third-largest oil reserves (around 172 billion barrels).

Around 95 percent of these reserves are heavy oil located in the province of Alberta in the west, in an area known as the Canadian oil sands, and the majority of it has no logistical transport route out of the province to international markets except through pipelines to the US.

If Canada is willing to ally with OPEC+ for the first time in history, then OPEC+ efforts could swiftly include other large producers including the US, Brazil, Mexico and Norway.

But why is Canada the first to openly to collaborate with OPEC+? 

According to Canada’s National Energy Board, in 2018, Canada exported 3.6 million barrels per day (bpd) to the US with a breakdown of 2.8 million bpd of heavy crude oil (unconventional bitumen and synthetic crude) and 800,000 bpd of light crude oil and condensate. This means that most of Canada’s oil is unconventional heavy crude favored by US refineries, and so most of that is exported to the US.

If Canada is willing to ally with OPEC+ for the first time in history, then OPEC+ efforts could swiftly include other large producers including the US, Brazil, Mexico and Norway.

Faisal Faeq

Canada had already adopted a temporary oil output cut policy at the end of 2018 — Alberta put in place an unprecedented oil policy, requiring its largest producers to cut output by 325,000 bpd. That took effect in January 2019, after the extreme price slump of the Canadian oil benchmark, Western Canadian Select (WCS), as a result of the pipelines to the US overfilling, and with other forms of transporting crude, such as by rail, proving prohibitively expensive.

WCS has become extremely important for US refineries ever since US imports from Venezuela dropped to zero amid sanctions imposed on Caracas by Washington. US shale oil, meanwhile, despite being produced in abundance, is unsuitable for many of these refineries.

The price of WCS has since collapsed to below $10 per barrel, threatening both the Canadian oil industry and the country’s wider economy.

As a result of the slowing global oil demand amid the coronavirus outbreak, further cuts will be necessary to respond to the reduction in demand, or commercial inventory levels could be breached very shortly, which could lead to shutdowns in the Canadian oil sands.

Such historical low-price levels will have been partly behind what has pushed Canada into falling in line with OPEC+, as Canadian oil sands producers are currently out of profitability range, with questions hanging over their resilience to low oil prices.

 

• Faisal Faeq is an energy and oil marketing adviser.He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq

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