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Fort McMurray in flames

More than 1 million b/d of oil is offline and the recovery will take weeks

NORTHERN Alberta more resembles a war zone than an oil-production hub, after wildfires raged across an area the size of Tokyo.

Water bombers and helicopters buzz overhead as the fire, now entering its second week of devastation, expands over 200,000 hectares and moves eastward into Saskatchewan. Convoys of equipment are at last moving north at military scale, while the final evacuations of some 25,000 oil sands employees – trapped work camps near Alberta’s production epicentre were completed by the Royal Canadian Mounted Police and air force.

Although the main danger has passed, the city of Fort McMurray is a desolate no-man’s land. Authorities have barricaded it and government officials say it will be weeks before some 88,000 residents are allowed to return. Thousands of evacuees are holed up in temporary shelters scattered from Edmonton to Calgary. Some had been living in their vehicles for days without food or water.

The fires on 2 May sparked an exodus. All manner of vehicles — including transit buses — fled south on Highway 63 to escape the flames. The “Oil Sands Road”, as it is known to locals, is the only thoroughfare in or out of town. On any given day, the 250km stretch of blacktop moves 3-5% of Canada’s GDP depending on crude prices.

For now, the timeline for a recovery in production is unclear. A return to full output depends on several factors, including repairs to the power grid and the return of workers to Fort McMurray

But it lacks essential services, like filling stations. The nearest signs of human habitation, at Wandering River, are more than 180km away. Dozens of cars and trucks were simply abandoned on the roadside and remain there. Authorities brought in fuel trucks and set up temporary sites along the length of the highway, makeshift pitstops to help motorists reach the nearest towns.

In restaurants and bars, exhausted Fort Mac escapees arrived with harrowing tales of driving through raging walls of fire to safety. Extraordinarily, the fires are thought not to have killed or injured anyone from Canada’s oil-production capital.

But oil sands output has not escaped unscathed. As much as 1.1m barrels a day of supply has been shut in, and could remain offline for weeks.

As soon as the scale of the blaze – the immediate cause of which remains unknown, although the area has suffered unseasonably hot and dry weather this spring – became plain, producers evacuated workers and powered off facilities in what was described as a controlled shut-down.

Barrel outage

Syncrude Canada, which produces 350,000 b/d, closed all three of its massive cokers simultaneously, the first such shut-down in its 40-year history. Shell shut two mines producing 255,000 b/d and Suncor closed its main mine, which processes 325,000 b/d.

The mines, located north of the Athabasca River that runs through the oil sands, escaped unscathed apart from some minor smoke damage.

The story was different south of the river, where several in situ producers were forced to shutter after downed power lines knocked out pipelines. Cnooc-Nexen’s Long Lake project reportedly took a direct hit from the flames, although fire breaks at the site prevented serious damage.

Unlike the surface mines, the oil in these oil sands areas is produced using thermal injection wells that rely on natural gas and water to bring it to surface. Then it must be thinned with natural gas liquids to be able to flow on pipelines.

The sudden lack of diluents was a key factor for Statoil as it shut its 60,000-b/d Leismer demonstration project, even though it is well out of the fire zone.

For now, the timeline for a recovery in production is unclear. A return to full output depends on several factors, including repairs to the power grid and the return of workers to Fort McMurray. Government officials stress that won’t be for several weeks at the earliest. The damage to the town is severe.

Even as crews gain the upper hand on the fires, the economic impact of the disaster is also unknown – though it will be huge. The cost of the shut-ins is already proving to be greater than any damage to oil-production facilities.

According to some estimates, the closures are costing Alberta C$70m ($55m) each day in lost revenue. Canada’s major banks have reduced second-quarter growth forecasts to zero from previous estimates of 1.5% expansion. Economists at ScotiaBank say the fires may erase 2% from Canada’s GDP, pushing the country into recession.

Surprisingly, the world’s oil market largely shrugged off the unexpected shut-downs in the oil sands, the single biggest source of foreign crude for the American market. It wasn’t until the US Energy Information Administration reported on 11 May an unexpected draw of 3.3m barrels in the previous week that prices reacted. Even then, a spike it was not.

Several reasons explain the complacency. Canadian oil has little direct impact on WTI pricing – its low quality means much of Canada’s bitumen supplies different refiners. Benchmark Western Canadian Select (WCS) trades as a differential to WTI – often deeply discounted – that is hedged by sellers.

Looking to stores

More significant is that stored crude has taken up the slack. Depots south of Fort McMurray have kept oil flowing through the pipelines, despite the upstream shut-downs for now. Enbridge’s Hardisty terminal, in central Alberta, the main point for exports to the US, has more than 11m barrels in storage. That has been enough to keep oil flowing south.

The stored oil can only last so long. Analysts from FirstEnergy Capital, a Calgary investment firm, say a disruption lasting more than two weeks will “tighten the market appreciably”, especially as the North American market heads into the summer, its peak demand and refinery activity season.

But two weeks looks too soon for anything like a full recovery. Some in the sector say two months is a more plausible outlook. Critically, workers who fled the town – many not long-term residents but itinerant staff living periodically in work camps – must return.

Meanwhile, although the oil-market implications are obvious, the impact on Alberta’s natural gas sector has been less obvious – but may even be worse. Oil sands plants consume about 1bn cubic feet a day of natural gas to generate heat and steam for bitumen extraction. The closures have wiped out that demand, sending the province’s gas prices to 35-year lows of C$0.50 per million British thermal units – less than a fifth the price of Henry Hub gas in the US. Analysts expect natural gas wells to be shut as storage hits capacity.

The better news is that critical infrastructure in Fort McMurray remains intact. The main power plant, water-treatment facility, airport and hospital were all saved. Officials estimate that 90% of the town was preserved thanks to the Herculean efforts of first responders, although it will be weeks before it is safe for residents to return.

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