OIL SANDS VULNERABLE TO LOW CRUDE PRICES Or Why the Keystone XL Debate Has Little Relevance

Shale Oil Growth in U.S. Hurts Canadians as Well as OPEC

By Robert Tuttle and Dan Murtaugh - Jan 21, 2015 bloomberg.com

OPEC isn’t the only victim of the growth in U.S. shale oil.

A surge of light oil from North Dakota and Texas is cutting into the earnings of Canadians who turn heavy oil sands into a lighter crude that fetches more from refiners. Producers in Alberta, home of the country’s greatest reserves, upgraded 20 percent less of the region’s crude in October than four years earlier, according to the province’s energy regulator.

Two of five plants under construction were canceled and the province’s upgrading and refining capacity fell in 2013 for the first time in three decades. Companies are now sending record amounts of the heavy stuff on pipelines and trains to refineries in the U.S. Midwest and Gulf Coast.

Oil Prices

Producers are not motivated to spend at least $10 billion building a facility to upgrade heavy oil into light oil, a product that is in oversupply,” Jackie Forrest, vice president of Calgary-based ARC Financial Corp., said in an e-mail. “When producers sell heavy oil directly, a product that is in short supply, they get a better return.”

Light synthetic crude produced by upgraders has been worth just $10.89 a barrel more then heavy crude in Alberta this month, down from about $25 in 2013, according to data compiled by Bloomberg. Projects including Suncor Energy Inc. (SU)’s Voyageur joint venture with France’s Total SA (FP) and Value Creation Inc.’s BA Energy Heartland were abandoned.

Hydraulic Fracturing

Global oil prices, down by more than 50 percent since June, will make upgrading projects even more challenging because the price difference between heavy and light crude is narrower, Forrest said. Prices plummeted as the U.S. pumped at the fastest pace in more than three decades and the Organization of Petroleum Exporting Countries resisted calls to cut production.

Brent, a benchmark for more than half of the world’s oil, added $1.04 to settle at $49.03 a barrel on the London-based ICE Futures Europe exchange. West Texas Intermediate gained $1.31 to $47.78.

Declining prices will reduce investment in oil drilling, the Canadian Association of Petroleum Producers said in a release Wednesday. Oil production growth will be slower than previously forecast by 65,000 barrels a day in 2015 and 120,000 in 2016.

Production Growth

U.S. output has risen 70 percent in the past five years as producers used horizontal drilling and hydraulic fracturing to tap into previously inaccessible shale rock layers thousands of feet below the Earth’s surface. Most of the increase has been in light, sweet crude, similar quality Alberta upgraders get from processing heavy, thick oil sands.

Just 175,000 barrels a day of upgrading capacity is being built as oil sands production expands by 912,000 barrels, according to the Alberta’s winter 2015 Oil Sands Industry Quarterly update.

As less is processed at home, more Canadian crude flows south. Exports to the U.S. rose to a record 3.26 million barrels a day the week ended Jan. 2, up more than 1 million since June 2010, U.S. Energy Information Administration data show.

The weak margins and lack of interest from companies hasn’t stopped Alberta’s provincial government from backing a group called the North West Redwater Partnership. Alberta has agreed to pay $26 billion over 30 years to process 37,500 barrels a day of bitumen, collected as royalties in kind from oil sands producers. The price works out to more than $63 for each barrel processed, more than twice the cost of the bitumen itself.

The project “came about mostly as a result of seeing a whole lot of upgrader projects canceled,” Andrew Leach, professor at the University of Alberta’s school of business, said in an e-mail. “This isn’t economically viable.”

Government Response

Alberta’s government disagrees.

“Once completed, we expect this to be a good project for Alberta with strategic benefits that include adding value to our resources, creating highly skilled jobs and generating tax revenues,” Derek Cummings, a spokesman for Alberta’s energy ministry, said in an e-mail. “Our expectation is that it will be profitable filling a niche market and providing badly needed diesel fuel.”

Ian MacGregor, chairman of the North West Upgrading Inc., a shareholder in the project, didn’t return a phone call for comment.

Canadian crude output has grown by 52 percent in the past five years, making the country the world’s fifth largest producer, according to data from the country’s National Energy Board and BP Plc. (BP/) Much of that production is thick and high in sulfur, making it worth less than light, sweet crude.

Heavy Processing

Several refineries in Midwest states including Indiana and Illinois invested billions of dollars in recent years to be able to process the plentiful supply of cheaper heavy crude. At the same time Enbridge Inc. (ENB) and TransCanada Corp. (TRP) expanded pipelines to bring more heavy Canadian crude to the Gulf Coast.

A total of 288,000 barrels a day of Canadian crude was sent to the Gulf Coast in October, a figure set to increase to 400,000 barrels a day after Enbridge started operating two new pipelines last month, according to ARC Financial’s Forrest.

The rising flows south of Canadian crude are drawing a backlash in Alberta from labor groups, who say jobs, not just oil, are being exported. Alberta’s 4.6 percent unemployment rate, second lowest in Canada after Saskatchewan, may increase after oil’s 55 percent drop in six months prompted some producers to curtail future investment.

“Building upgraders in Alberta is seen by the industry as uneconomic,” Dinara Millington, a vice president at the Canadian Energy Research Institute, said in an e-mail Jan. 13. “The U.S. refining market is being flooded with the light crude and they wouldn’t necessarily want our light stuff.”

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Prince Alaweed predicts end of $100 per barrel oil, which could hamper future production in Alberta

by Charlie Smith on Jan 24, 2015 at 1:07 pm  .straight.com

An influential Saudi Arabian prince has declared that oil prices will never again reach (US)$100 a barrel.

"I think the era of (US)$100 plus really was an aberration and I think we'll never see it again," Prince Alaweed Bin Talal told Bloomberg in a phone interview.

Prince Alaweed, chairman of Kingdom Holding Co., is ranked 35th on Forbes magazine's list of the world's billionaires with an estimated net worth of $21.1 billion.

He told Bloomberg that he expects oil prices to increase because of rising demand in China, India, and other countries.

However, Prince Alaweed also cautioned that if Iran and the United States reach a diplomatic resolution, that could increase the global supply of oil, which could put downward pressure on prices.

According to the Saudi prince, Iran could boost production by up to three million barrels per day. This is one reason why he expects prices to settle somewhere between (US)$45 per barrel and (US)$100 per barrel.

[West Texas Intermediate crude is slightly above (US)$45 per barrel whereas Brent crude is over (US)$48 per barrel.]

If Prince Alaweed is correct with this long-term forecast, it could have serious ramifications for oil production in Alberta. Crude oil prices have already fallen more than 50 percent since June.

The Carbon Tracker Initiative reported in November that $271 billion worth of capital projects in Canada's oil sands require oil prices of more than (US)$95 per barrel to generate a reasonable return on investment.

When asked why Saudi Arabia didn't immediately curtail production to raise the world price, Prince Alaweed replied that other countries desperate for revenue would simply boost their supplies.

He suggested that this would offset the impact of any reduced output from his country.

Prince Alaweed also stated that King Salman, who recently succeeded King Abdullah, supports Saudi Arabia's current oil-production level.

"No doubt about that," he stated. "Prince Salman, when he was prince at that time, he was chairing the council of ministers meeting that approved that particular decision."

Saudi Arabia is a key member of OPEC, which agreed in November to maintain production levels at 30 million barrels per day.

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