Raging oil sands wildfire sends differentials surging

Wed May 4, 2016 9:48pm EDT
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By Nia Williams and Catherine Ngai

CALGARY, Alberta/NEW YORK (Reuters) - Canadian heavy crude differentials hit their strongest level in two months on Wednesday as a wildfire raging in Fort McMurray in the heart of Alberta's oil sands region forced some projects to cut output and pipelines to shut down.

The city's population of around 88,000 was ordered to leave immediately on Tuesday evening as the fire breached city limits and ripped through some neighborhoods.

By Wednesday afternoon, city officials said the blaze could grow even worse and a slew of oil sands operators including Suncor Energy Inc SU.TO, Syncrude and Shell Canada RDSa.L said they were reducing production.

Although the blaze is not directly threatening any facilities in the vast oil sands, which hold the world's third-largest crude reserves after Saudi Arabia and Venezuela, it disrupted some operations.

Producers cut production to allow workers to evacuate safely, and Inter Pipeline Ltd IPL.TO partially suspended one diluent pipeline and shut down its Corridor pipeline system, which serves Shell's operations.

A domino effect quickly emerged, as Husky Energy HSE.TO was forced to reduce production at its oil sands project because of the Inter Pipeline diluent shutdown, suggesting more projects may be forced to follow suit.

The full impact of cuts on oil sands production, which totals about 2.2 million barrels per day, was not immediately clear but Husky said it had reduced output by 20,000 barrels per day and Shell's production capacity is 255,000 bpd.

"If it (the production cuts from the fire) starts dragging into a week or so, the impact will become more acute," said FirstEnergy Capital analyst Martin King.   Continued...