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Canada’s oil producers face potential headwinds from wildfires, railroad strike

Western Canadian producers remain vigilant and are cautiously optimistic on the face of headwinds they are facing from raging wildfires and an impending railroad strike later this month, industry participants said May 14.

So far, no producer has announced any shut-ins and provincial governments in Alberta and British Columbia are deploying resources to contain wildfires at Fort McMurray (the hub of oil sands production) and Fort Nelson (a leading gas production and transit area).

The fires have so far been neutral for Western Canadian Select crude prices, according to S&P Global Commodity Insights analyst James Bambino.

“At present the scenario remains neutral for crude prices. Should the wildfires shift east toward production facilities, an already tight global and US Gulf Coast heavy sour crude market will likely continue to strengthen,” he said.

The WCS at Hardisty discount to WTI has tightened in recent months, in part because of the expansion of the Trans Mountain crude pipeline. WCS has averaged at a $12.33/b discount to WTI so far in May, up from a $25.44/b discount in November, Platts assessments show. Platts is a unit of S&P Global.

The Alberta Energy Regulator said in its latest update on May 5 that Alberta’s total oil production in March was 4 million b/d, up 4.8% on the year.

Output in the province in the first quarter of 2024 averaged 3.9 million b/d, AER said.

The wildfire danger is extreme in the Fort McMurray Forest Area and Alberta Wildfire is currently responding to an out-of-control wildfire southwest of Fort McMurray that is 9,602 hectares in size, the provincial government said in its morning update.

The wildfire grew significantly to the northeast May 13 and the closest point of the fire is about 13.5 km (9 miles) from Fort McMurray, it said.

Winds are expected from the west-southwest May 14, which will be challenging for firefighters, the provincial government said.

A wildfire in the community of Fort Nelson has significantly expanded as residents in British Columbia’s northeast receive more mandatory evacuation orders, the BC Wildfire Service said, adding the fire has grown to over 84 square km (54 square miles) since early May 13, when it was just under 53 square km (34 square miles).

As of early May 14, 4,700 residents in Fort Nelson and Fort Nelson First Nation areas have been placed under evacuation, British Columbia’s Emergency Management Minister Bowinn Ma said.

“The situation is still wait and see and, so far, there has been no visible impact to either Western Canadian gas production or demand as a result of the current fire conditions,” S&P Global analyst Ian Archer said.

“But if they worsen, they could impact both production and demand, depending on the region. Wildfires in Fort Nelson and Grand Prairie would impact natural gas production if facilities need to be shut in prior to evacuation,” Archer said.

The Fort Nelson region supplies around 1.3 Bcf/d of gas to the Westcoast T-North pipeline system. The Grand Prairie region is also a key gas production area.

Oil sands impact, railroad strike
The fire near Fort McMurray would impact demand if conditions worsen there and oil sands facilities need to be shut in, Archer said.

Last May, wildfires resulted in producers shutting in at their peak 385,000 b/d of oil equivalent output, according to S&P Global.

As a result, WCS at Hardisty rallied to WTI minus $10.20/b, from an average of minus $15.13/b in April.

Besides wildfires, Alberta’s oil sands are also facing a looming strike due to start May 22 by both the railroads – Canadian National and CP Kansas City.

Canadian workers union TCRC has called for strike as no resolution has been arrived with the railroads even after months of talks on the “maintenance of activities” agreement, it said.

CN and CPKC combined moved an average 118,967 b/d of Western Canadian crude in 2023 in rail cars, the Canada Energy Regulator said.

In January, that volume was 150,292 b/d, CER said in its latest update.

However, a tightening of crude price spreads will likely limit Canadian crude by rail. The WCS price at Nederland, Texas has averaged at a $6.60/b premium to the WCS at Hardisty price so far in May, tightening roughly $10/b since November, Platts data shows.
Source: Platts

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