Published on Tuesday, March 3 2020
Authors : Sam Davis and John Auers

Continuing pipeline constraints out of Western Canada and the ensuing production curtailment program that began in early 2019 has resulted in significant price volatility between the WTI and WCS benchmark differentials over the last couple of years.    Canadian integrated refiners have experienced both the best and the worst of these price swings, with upstream earnings benefitting from the narrower spreads in 2019 due to the production cutbacks, while their downstream segments suffered for the same reason.  This was just the opposite of the dynamic in 2018, when the differential averaged over $26/bbl, compared to 2019’s average of less than $13/bbl.  The Q4 earnings calls highlighted differences of opinion amongst the Canadian integrated refiners on the government mandated production cuts, in large part depending on their level of upstream vs. downstream asset split, but also due to philosophical differences.  Some viewed the curtailment policy as a positive step toward fully monetizing Canadian oil reserves and boosting government royalties. Others saw it as a temporary short-term fix that does not address underlying issues with increasing takeaway capacity but instead creates market uncertainty, introduces volatility, and further erodes investor confidence. In this week’s blog, we examine steps these refiners are taking to move beyond pipeline constraints and production curtailments as they focus on moving past their differences and driving improved profitability for their shareholders.


Suncor Energy announced on their call that it no longer plans to progress the $2 billion coker project at its Montreal refinery, a decision reached after the company determined it was not a prudent use of shareholder investment capital.  The coker was expected to allow the 138 MBPD Montreal refinery to process 40-50 MBPD of bitumen based crude.  Instead, it now plans to explore opportunities to integrate those barrels across the rest of its asset base.  Suncor continues to evaluate debottlenecking opportunities at the Edmonton refinery which today processes 100% bitumen crudes.

As was the case in the earnings calls of most other oil companies, Suncor also provided an update on its effort to curb carbon emissions. Six years ago, Suncor set a goal of reducing greenhouse gas intensity by 30% by the year 2030. In 2019, the company made investments in EV charging stations and acquired an equity interest in the Canadian biofuels company Enerkem, helping it achieve 10% of its 30% target reduction. Executives on the call touted the progress made on achieving the next 10% target so far with investment decisions made in the last six months on a $1.4 billion co-gen project and a $300 million Phase 1 wind farm project. The co-gen project is set to replace the coke-fired boilers at its oil sands base plant with two cogeneration units and is expected to be completed by 2023. Meanwhile, the wind power project is expected to be developed in two phases with the first phase kicking off construction this year. The wind farm will be designed to generate 200 MW of power and expected to be completed by the end of 2021. On the remaining 10% target emissions reduction, Suncor mentioned the company is still scoping out and expects to announce details at a later date.


On its earnings call, Cenovus discussed the continued commitment to its rail program and announced it exceeded an important milestone by moving more than 100 MBPD of crude by rail at the end of 2019. The company had stated at the beginning of last year its plans to grow its crude by rail business from 15 – 20 MBPD during Q1 2019 to 100 MBPD by year end. Cenovus was also able to take advantage of the recently announced Special Production Allowance (SPA) program which allows producers to exceed the Alberta government’s mandated production curtailment levels if surplus crude can be shipped by rail. With crude by rail being an important part of the company’s strategy to improve market access and realize higher prices, Cenovus plans to continue further optimization to achieve ratable movements of about 100 MBPD each month. The company is also making investments at its Bruderheim rail facility to expand loading capacity up to 120 MBPD. Cenovus also announced that the SPA now allows it to bring on volumes from its Christina Lake phase G expansion within the next year.

Cenovus is also considering investing in a Diluent Recovery Unit (DRU), to reduce diluent requirements and free up pipeline space out of Alberta. Company executives mentioned that they are still in the assessment stage and expect to make a final investment decision later this year. Meanwhile, the company recently filed for regulatory approval with the Alberta Energy Regulator for construction of the DRU at the Bruderheim Rail Terminal. The filing indicates the DRU would separate up to 190 MBPD of diluted bitumen, delivered by pipeline from the company’s oil sands, into undiluted “neatbit” and diluent components.

Cenovus also highlighted on the call its announcement last month of new Environmental, Social and Governance (ESG) targets in four focus areas of climate and greenhouse gas emissions; indigenous engagement; land and wildlife; and water stewardship. These targets include a goal to reduce upstream GHG emissions intensity by another 30% and keep absolute emissions flat by 2030 as well as a 2050 aspiration of net zero emissions. In addition, the company also announced an initiative to invest in building homes in six First Nation communities located closest to oil sands operations as a way of contributing to reconciliation with indigenous communities.


Husky Energy announced on the call that the crude flexibility project at its Lima refinery was completed at the end of 2019. The project, which increases heavy crude upgrading at the site to 40 MBPD, experienced some delays upon start-up which contributed to lower Q4 earnings in its downstream segment. The company also completed in Q4 the sale of its 12 MBPD Prince George’s refinery to Tidewater Midstream for $215 million, with an additional $60 million contingent payment over the next two years. For Husky, the sale of the refinery and its retail sites completes a strategic move out of the retail fuels market as the company focuses on its upstream operations and core refining assets at the Lima and Toledo, Ohio sites. The company is also making progress with the rebuild of the 45 MBPD Superior refinery and announced in September that all required permit approvals for reconstruction activities have been received. Husky expects the refinery, once fully operational in 2021, to feature best available control technology, improved energy efficiency, and the capability to process up to 25 MBPD of heavy crude.


Imperial Oil highlighted on the earnings call the impact that the crude production curtailment has had on their crude by rail economics. The company reportedly had zero crude by rail movements in October last year with volumes picking up in November and ending the year with 88 MBPD in December. Imperial has been very vocal about its displeasure with the Alberta government’s curtail program, particularly from recently retired CEO Rich Kruger who last year called out the government for causing unintended consequences by attempting to artificially control prices. The company’s new CEO, Brad Corson, following in the footsteps of his predecessor, mentioned on the call that crude by rail economics continue to be volatile, which he said was amplified by the two week Keystone pipeline outage in November last year, making it challenging to operate their business.

Unlike its competitor, Cenovus, Imperial has decided that pursuing an investment in DRU does not make sense for the company at this time, and that while diluent is an important cost driver for them and is integral to their business, the economics are not compelling enough for them to pursue but that they remain open to continuing to evaluate in the future. Instead, the company announced it is focusing on growing its market share in the asphalt business with a planned asphalt expansion project at its 190 MBPD Strathcona refinery. Imperial mentioned it is still performing feasibility assessment but that the project is targeted to increase asphalt capacity at the refinery by 20-25%.

Our Takeaways from the Earnings Calls

The most recent government intervention in the Canadian oil industry has created a “loophole” for producers to circumvent curtailment limits through its announced SPA. While this program allows shippers to use all available rail capacity, uncertainty still exists on whether the curtailment will actually be lifted at the end of the year as planned should differentials remain at levels considered detrimental to upstream producer earnings. This uncertainty has led to delays in commitment on investment projects as is the case with Suncor holding back plans to debottleneck its oil sands mine at Fort Hills. The challenge the entire industry faces is a potential lack of confidence in a competitive, free market system that allows the market to manage itself in more efficient ways. Case in point, Cenovus on its earnings call suggested that the government should manage the WTI-WCS differential at $10/bbl or essentially the crude quality difference plus the cost of pipeline transport from Alberta to the Gulf Coast.

While crude by rail has certainly emerged as a viable means of evacuating heavy crude from Western Canada, building a DRU is also now being considered as part of market access strategy for some Canadian producers. However, the economics on whether to build one comes down to a view of whether Western Canada continues to be constrained takeaway capacity. Should pipeline projects continue to be delayed, a combination of DRU and rail to lock up differentials could be a prudent strategy as Cenovus is currently considering. DRU investments also help resolve market access issues by providing complex refineries an uplift on neatbit; especially Gulf Coast refineries with increasingly less supply from traditional heavy crude producing countries.

In closing, Canadian Integrated Refiners are just as focused on carbon reduction solutions as U.S Independent Refiners and Global Oil Majors. They are also pursuing high return investments in ESG as a way of demonstrating that both can be achieved – reduce carbon emissions and be profitable while doing so. Suncor’s announced $2 billion incremental annual free cash flow target by 2023 highlights this. The company expects the cogen and wind power projects to reduce carbon footprint while generating good returns and contributing toward their profit goals.

Turner, Mason & Company has recently published a multi-client study focused on the future of Canadian bitumen. The study assesses heavy crude transportation options out of Western Canada, provides an analysis of different bitumen blending and upgrading cases, and evaluates the economics of DRU’s and their impact on crude by rail economics.  Please Click Here to access the “Table of Contents” which provides more details on the topics covered in the study. If you would like more information on the study, on our other industry studies (such as the Crude and Refined Products Outlook and World Refinery Construction Outlook) or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.

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