The rupture of an Enbridge oil pipeline is draining millions of dollars per day from the profit margins of Alberta's heavy-crude producers as a sudden supply glut in Canada depresses prices.
Since Enbridge's Line 6B was knocked out of service in Michigan in late July, crude supplies have been backing up in Canada, resulting in a slide in oil prices for Canadian product.
Relative to U.S. prices, Canadian heavy oil futures are down by more than $9 (U.S.) a barrel, while lighter sweet crudes have also dropped sharply - about $6 a barrel.
"We're absolutely getting destroyed," said Tim Gunn, the president of Net Energy Inc., a Calgary brokerage firm that tracks prices.
Some energy companies have locked in parts of their crude output at higher prices. But for the many producers that ride the swings in oil price, the rapid price tumble has stripped away a sizeable percentage of profit margins.
"It's huge," said Stephen Fekete, a managing consultant with international crude consultancy Purvin & Gertz. "It will certainly be noted in the quarterly statements by all the big guys on impact on earnings."
The price of both heavy and light crude in Canada is traded as a differential, or discount, to the U.S. crude benchmarks that are typically reported as the daily oil price. But over the past month and a half, the Canadian energy industry has found itself receiving substantially less than that daily price - a problem that is magnified by the sheer number of barrels produced. Canada exported nearly 2.2 million barrels of oil in May, the latest month for which data is available.
Although Enbridge has largely cleaned up its oil spill that started in late July, and submitted plans to reopen the 190,000-barrel-per-day pipeline, it is still waiting for approval from the U.S. Office of Pipeline Safety, which continues to review those plans.
With no firm opening date, the pipeline shutdown has hurt prices by creating an export logjam and, consequently, a supply glut north of the border. That, however, is only part of the problem. The summer road-building season is coming to a close, reducing demand for heavy crude, the feedstock for asphalt. And Husky Energy Inc. recently began scheduled maintenance of its Lloydminster upgrader, which when it is operating transforms heavy into light crude. Now that it's down, even more heavy product is flooding the market.
Together, these issues have blown open what's known as the heavy oil differential. Heavy oil, because it requires additional refining to make into end products like gasoline and jet fuel, trades at a discount to lighter crude oil benchmarks. Strong demand for Canadian crude had shrunk that discount to 15 per cent and below earlier this year.
With the recent problems, it has now expanded to more than 30 per cent as futures in Western Canadian Select, a heavy blend, sell for about $26 less than (lighter) sweet crude, according to Net Energy. That's plummeted from the $17 differential on July 26, the day of the Enbridge pipeline rupture.
The backup is also hurting the price of lighter Canadian crude, which typically trades close to the U.S. benchmarks. On Monday, the highest offer was for $10 below that benchmark, a huge disparity.
"It's unbelievable," Mr. Gunn said. "I went back and looked at our historical data, and sweet prices are trading at the absolute widest they've ever traded, except for once."
For the industry, the price drop comes as an unexpected hit at a time when stable oil prices have begun to re-inject confidence into new crude exploration and oil sands production.
Still, producers say the pain is tempered by the expectation that it will be short-lived. Many expect the low prices to recover quickly after Enbridge brings Line 6B back into service.
"It's probably a short-run phenomenon," said Dick Gusella, the chief executive officer of Connacher Oil and Gas Ltd., which has been able to continue selling all of its production.
"I've been through enough cycles - up, down and sideways - that I think the sun is probably still going to come up tomorrow."