WALL STREET JOURNAL: Forest Fires Cut Into Canadian Oil Production

Repost from the Wall Street Journal

Forest Fires Cut Into Canadian Oil Production

Alberta oil-sands companies reduce output, evacuate staff due to risk from encroaching blazes

By CHESTER DAWSON, Updated May 6, 2016 2:01 a.m. ET
The Suncor tar sands processing plant near near Fort McMurray, Alberta. Forest fires continued to rage in Canada’s oil-rich province of Alberta on Thursday. PHOTO: REUTERS

CALGARY, Alberta—Raging forest fires in the heart of Canada’s oil-sands region curbed production and helped drive up global prices on Thursday as some worried enough oil was threatened to nearly wipe out the world’s oversupply.

Many companies evacuated staff and cut production because of pipeline outages and the risk from encroaching blazes. No oil operations reported fire damage, but their efforts to protect themselves led to a reduction of at least 645,000 barrels a day, or almost one-quarter of Canada’s 2.5 million barrels in total oil sands production. Much of that output is sent to refineries in the U.S.

The outages are widely expected to be temporary, but they drove up the price of typically heavily discounted Canadian crude in recent trading. Prices for the U.S. benchmark crude rose 1.2% to $44.32 a barrel Thursday, and the global benchmark gained about 1%—with worries about lower supplies from Libya and Nigeria also affecting trading.

If oil production now threatened by the Canadian fires were halted, it would be enough to nearly wipe out the world’s oversupply, said Tim Pickering, chief investment officer of Calgary-based Auspice Capital Advisors Ltd., which manages $300 million and an exchange-traded fund based on the Canadian Crude Index.

“This is the most important issue in oil today,” Mr. Pickering said. “That will put the system back in check really quick.”

Oil prices have been pressured for almost two years by excess supplies. But production has started to fall in the U.S. and elsewhere following massive spending cuts by energy companies. Meanwhile, demand continues to grow.

Analysts say the global market is less oversupplied than it was even a few months ago at a time when producers’ capacity to ramp up production has been reduced. That makes the oil market more vulnerable to a shortage if production is halted in any part of the world.

In addition to Canada, oil traders are currently worried about lower supplies from Libya because of political unrest and from Nigeria due to a pipeline outage. Some analysts also warn that Venezuela’s oil production could fall amid the country’s struggling economy and power shortages.

The longer-term impact of the Alberta fire remains unclear. Some officials say production will likely bounce back once the fire threat recedes; others say damage to infrastructure and from displaced workers could hamper efforts to ramp up output once the fires are put out.

“I expect we’ll recover fairly quickly, but it’s too early to say how much damage has been done to equipment and operations in the town of Fort McMurray,” Steve Laut, president of Canadian Natural Resources Ltd., said on a conference call with analysts. Mr. Laut said that oil sands output at his company, a major oil and gas producer, hasn’t been affected by the disaster.

But the Bank of Nova Scotia said the destruction of property and loss of production at other oil sands operations could cast a long shadow. The forest fire fallout could mean “very little” GDP growth for the overall Canadian economy in the second quarter and that the damage to infrastructure will slow the recovery in the country’s oil patch, the bank said in a report.

In the latest of a series of plant closures, Suncor Energy Inc., Canada’s largest producer, late Thursday shut down all of its wholly owned oil sands assets, including two mines and a pair of well sites, which had been producing a total of 300,000 barrels a day. It had previously reduced output at another mining operation called Syncrude, in which it owns a controlling stake.

Exxon Mobil Corp.’s Imperial Oil and ConocoPhillips also shut some production earlier Thursday. Exxon cut output by an undisclosed amount at its 194,000 barrel-a-day mine, citing “uncertainties.” Conoco halted a 50,000 barrel-a-day mine and evacuated all staff due to a fire near the town of Anzac. They followed a move Wednesday by Nexen Energy ULC, a subsidiary of China’s Cnooc Ltd. On Wednesday, the Canadian unit of Royal Dutch Shell PLC shut down two oil-sands mines, which produce 255,000 barrels a day, that it owns in partnership with Chevron Corp. and Marathon Oil Corp.

“That’s largely being done to allow folks to focus on rendering aid to the community and emergency response,” Lee Tillman, chief executive of Marathon Oil said on a conference call. “The mines themselves are not under any direct or immediate threat.”

—Nicole Friedman, Timothy Puko and Erin Ailworth contributed to this article.