Canadian Update -- Part 2, RBN Energy -- February 16, 2016

Canadian Heavy Crude Oil Producers Can’t Make It Up on Volume -- RBN Energy (archived).

Most Canadian oil sands crude production comes from very expensive mining or underground steam heating operations designed to produce consistently for decades that are costly to shutter in a downturn. Right now the crude netbacks (market price les transport costs) for these projects are more or less under water depending on transport routes. Yet production continues and new projects are still coming online. Today we estimate the netbacks (market price less transport cost) that Canadian producers are realizing.

In Episode 1 of this series we reviewed the woes of hard-pressed Canadian producers in the face of ever lower crude prices. U.S. shale producers are struggling to keep the debt collectors from their doors and cutting capital budgets left and right to survive with prices for benchmark West Texas Intermediate (WTI) trading below $30/Bbl. Yet $30/Bbl probably sounds like lottery money to their counterparts in the Western Canadian oil sands. Crude prices there for benchmark Western Canadian Select (WCS) are currently (11 February 2016) trading at a $12/Bbl discount to WTI in Hardisty, Alberta – reflecting the higher transport cost to get Canadian crude to U.S. refineries and quality differentials for heavier oil sands grades.

That means Canadian producers get $15/Bbl at best ($14.20/Bbl on February 11, 2016) for their crude in Alberta. And some of that $15/Bbl has already been spent to buy the lighter and more expensive hydrocarbon diluent that is required to blend heavy oil sands bitumen at the lease so that it can flow in pipelines.  Since most of the demand for heavy oil sands crude comes from U.S. refiners – in the Midwest or increasingly on the Gulf Coast – producers have to eat high transportation costs to get their crude to market. We also discussed how oil sands extraction plants that use steam assisted gravity drainage (SAGD – used by the majority of recent projects) are difficult to shut down when economics are this bad – because the start up process is very lengthy and expensive and the process of stopping production can damage the resource reservoir.

In the circumstances cash struck producers are selling midstream assets and hunkering down even as – in some cases – they are experiencing a net cash outflow on every barrel produced. In today’s episode we take a look at the economics for a typical oil sands producer to understand just how bad things are in the Canadian oil patch these days.