Tuesday, January 15, 2013

Canadian Oil In A World Of Pain -- Think What Could Have Been


Below: a flurry of articles regarding the Albert oil sands. After reading these articles and thinking about geopolitical events, these are my thoughts: 

I think Canada, specifically Alberta, is in deep trouble. Their own government is hesitant about taking on environmental groups to build a pipeline to their coast to send Canadian oil to Asia. And this despite the fact that Canada is learning the lesson of relying on one customer (the US).

Whether or not they say it outright, everything depends on approval of Keystone XL. "Everybody" suggests this is a slam-dunk. Some have even gone so far to suggest that EPA director Lisa Jackson resigned over the likelihood that President Obama will approve the pipeline this summer. In fact, he can't approve it until the State Department approves it, and that can't happen until John Kerry is sworn in as the new SecState, and he just doesn't strike me as someone who will simply approve the pipeline without his own "research." 

Below, at least one Canadian oil spokesman/optimist feels that the oil sands prices will improve in 2014. I assume he, too, is betting on approval of the Keystone XL. Assuming he is correct, two things jump out at me:
a) the WTI/WCS spread is almost $40; unsustainable; the oil sands price will have to jump significantly to narrow that spread; can the Keystone XL do that?
b) assuming WCS will increase in price, even those optimistic say it won't happen until 2014 -- that's a year away; the question: can Alberta wait that long?
If the Canadians cut back on production, all things being equal, this should be good news for the Bakken.

January 16, 2013: part of the reason for the further drop in price of WCS was due to a fire at a US refinery using Canadian oil; that refinery will be back on-line shortly (if it's not already back on line)

January 16, 2013: Can Alberta survive to 2014? Huge bet on Keykstone XL.

The extremely low price for bitumen, which is currently sapping Alberta government revenues, should rise in 2014, according to the former chief executive of Suncor Energy.
But the “serious” situation should remind Albertans about the dangers of having basically one customer for your product, Rick George said during the Edmonton Economic Development Corporation’s annual luncheon on Tuesday at the Shaw Conference Centre.
“This differential (the spread between prices for Alberta’s bitumen and U.S. oil) is serious and it goes back to the fact that we need more export capacity and we need more markets than the U.S.,” he said.
George expects the northern segment of the Keystone XL pipeline, the section proposed to run between Hardisty and Nebraska, to be approved by the U.S., as well as the Line 9 reversal which will bring Western and U.S. light crude to the Montreal refinery. These two projects will be important factors in getting the differential gap to shrink. But export markets outside the U.S. are vital.
January 16, 2013: Canadians need to win on the Keystone XL.
“Overall, the U.S. gulf coast is a huge crude oil market – nearly equivalent to all of China today,” says the IHS report, written by a team of three experts including the company’s global oil director, Jackie Forrest. “Consequently, the U.S. gulf coast will be a critical part of the future for oilsands, particularly for bitumen blends.”
University of Calgary energy economist Michael Moore says the IHS report suggests the province should be focused on getting approval to build the Keystone XL pipeline to get oilsands products to the Texas gulf coast.
January 16, 2013: Suncor weighing decision to cut expansion in the oil sands
Suncor Energy Inc. is considering making an C$11.6 billion ($11.8 billion) oil-sands project the first major spending reduction among Alberta energy producers as the region’s crude prices sink to the lowest in the world.
The oil-sands benchmark, West Canada Select, traded at a record $42.50 a barrel less than U.S. crude on Dec. 14.
Canadian companies are forgoing about C$2.5 billion a month because of the lower prices, according to an estimate by Houston-based investment bank PPHB Securities LP. The discount has helped erode Canadian oil profits and hurt companies’ shares.
Original Post

This is not the first story on the fall in price of Canadian heavy oil but it's one of the most recent, and most concerning for Canadian oil companies. A reader sent this to me:
Canadian heavy oil prices, pressured by a combination of tight pipeline capacity and delays in a U.S. refinery retooling, have fallen close to the trigger point for companies to begin shutting off some production, an analyst said on Tuesday.
Prices for Western Canada Select (WCS) heavy blend, a widely quoted grade, have fallen recently to around $50 a barrel, less than half the price of a barrel of international benchmark Brent, pressuring the bottom lines of producers.
With little in the way of new pipeline capacity expected in the coming months, the deep discount is expected to persist, said FirstEnergy Capital Corp analyst Martin King.
The first production that is likely to get shut down will be traditional heavy oil, in which low-volume wells pump crude without the aid of steam or other enhanced recovery, King said.
"You've got to think that the more conventional heavy is probably borderline right now," he told Reuters after speaking to an industry audience in Calgary.
He said such supplies are likely to require a price of $45-$50 a barrel to generate positive cash flow.
This all goes back to the killing of the Keystone XL. Amazing. This, of course, probably puts downward pressure on all North American oil ... until they stop producing producing completely. 

One can track WCS here.

However, according to analysts, the US still needs that Canadian oil:
The US will continue to need hydrocarbons from the oil sands of Canada despite its rising output of light oil from tight formations, which nevertheless are reshaping markets for heavy Canadian material, says IHS. 
Although production from tight formations in the US eclipsed that of output from the Canadian oil sands last year—2.2 million b/d vs. 1.7 million b/d—it does not eliminate the US need for imports, according to the IHS CERA Oil Sands Energy Dialogue report. If demand changes little and US conventional supply declines, tight oil can replace only about one third of US net oil imports by the end of the decade.
Expansion of tight oil supply has created transportation bottlenecks and glutted the US Midwest, destination of 80% of exports from the oil sands region, IHS points out.
Synthetic crude oil (SCO) from upgraders in Alberta, historically more than half the supply from the oil sands, now competes with tight oil. Most future supply from the oil sands will be blended bitumen, similar to heavy crude oils the US now imports.
So, we'll see. 


  1. Bruce, you have created an excellent summary above, thank you.

    I would like to ask your thoughts on the opening of the Seaway Reversal and if the 400,000 bpd capacity it brings will relieve enough pressure at Cushing to significantly raise the value that producers receive.

    1. I have no idea. All I can do is watch for the next six months or so. But if reversing the flow and increasing the capacity from 150,000 to 400,000 doesn't help, it just shows how much production the Bakken is capable of.

      This is going to be very, very interesting to watch. I think the best number to watch is the production coming out of the Bakken. The month-over-over-month increase has been about 3%. If the increased takeaway (Seaway, Enbridge, rail, etc) is "material" in nature, then we should see significant increase in Bakken production (all things being equal). It is my understanding that much of the Bakken is choked back because a) of flaring issues; and, b) takeaway capacity.

      But I'm going to be watching the monthly production figures.