Giving the stuff away

December 20, 2012

Canadian crude prices are at their lowest levels against Brent-priced crude in 10 months, reaching a new market low and trading last week at under $50/barrel.

There are three reasons for low Canadian crude prices, according to Jen Alic of OilPrice.com:

• 1. Refining capacity isn’t evolving fast enough.  A key reason for this was the announcement by BP Plc (BP/) that it would delay a project to run ore heavy oil at its Whiting refining in Indiana for at least three months. BP’s project aims to convert a heavy crude processing unit with a 225,000-barrel/day capacity to enable 420,000 bpd capacity for processing Canadian crude. Originally, that was to be completed in the first half of 2013. The timeline has now been pushed to the second half of 2013. 
• 2.Supply is increasing. The oil sands keeps growing. Canada’s Imperial Oil Ltd is now preparing to launch operations at another new oil sands site, Kearl, and is expecting to produce another 110,000 bpd of bitumen. This bitumen doesn’t need to be refined. It goes straight to the pipeline. Production should begin in January. 
• 3.Pipeline capacity is tight. Enbridge says its pipelines are at capacity. Indeed Canada has little capacity for exporting additional oil. According to the Globe and Mail, analysts have estimated that Canada could run out of export pipeline room sometime between 2014 and 2018. Canada is so desperate to see the beleaguered Keystone XL pipeline clear the remaining hurdles in the US. It is still unclear what the Obama administration will decide.
• 4.Another important point is that US production of crude oil is increasing, due to hydraulic fracking and horizontal drilling in the Bakken and other areas. In the last 3 months US crude oil production reached a high not seen since 1997. Increasing production serves to dampen prices. Canadian exports account for about 1/4 of US imports.

Alberta’s Energy Minister has stated that the lower prices cost provincial producers $2.5 B/month.

 

Commentary

The inability of producers to realize the best price for the commodity puts a damper on investor returns and incentives to invest. The current price of $90/barrel (WTI) is likely to fall. The US government’s Energy Information Administration suggests $88 /barrel oil (WTI) in 2013, while Forbes Magazine suggests $78/barrel.

The oil sands is a high cost play. Lower oil prices and constrained pipeline capacity are making the case for oil sands investments increasingly difficult.

Sources

• a)Jen Alic "Why Canadian Crude is the cheapest in the world" see http://oilprice.com/Energy/Crude-Oil/Why-Canadian-Crude-is-the-Cheapest-in-the-World.html



• b)http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS1&f=M and http://www.eia.gov/forecasts/steo/



• c)http://www.forbes.com/sites/greatspeculations/2012/11/09/crude-oil-wants-to-slip-below-80-again-test-78/