TransCanada Corporation (USA) (TRP): Keystone Won’t End Canada’s Oil Glut

Investor implications

For Canadian oil producers, investors will have to cut back on their production growth estimates if sufficient pipeline capacity can’t be added . Investors should also be concerned that the price these producers receive for their product will diminish.

Already, Western Canadian Synthetic, a barometer of oil sand crude prices, trades at a $20/brl discount to international benchmarks. This could widen considerably as new production is added and supply chain bottlenecks get worse.

As the largest player in the oil sands, Suncor Energy Inc. (USA) (NYSE:SU) is a bellwether.

In 2012, Suncor’s oil sand operations produced 325,000 b/d with the goal of increasing production 10% annually over the next decade. Those expectations have already been ratcheted down and may need to be reduced further.

Earlier this year, the company slashed $1-billion from its 2013 capital spending budget, cutting spending in the Fort McMurray region nearly in half compared to early expectations for 2012. Suncor also cancelled its $11.6 billion Voyageur upgrader plant.

The decision clouds the outlook on the company’s Fort Hills expansion, another major oil sands development. A decision is expected by the end of the year but the company hasn’t been direct with investors regarding its plans.

Expect similar decisions from other upstream producers in the Canadian oil patch if conditions do not improve.

Foolish bottom line

For the Canadian oil sands, everything hinges on the approval of the Keystone XL pipeline. But even if the project is approved, it might not be enough to save the industry.

The article Keystone Won’t End Canada’s Oil Glut originally appeared on Fool.com and is written by Robert Baillieul.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway (NYSE:CNI). Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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