January 9, 2009 at 1:15 pm #3247
Canada’s oil sells for less
NORVAL SCOTT Thursday, January 08, 2009
CALGARY – A supply glut has jammed up Canada’s pipeline system, driving the price of Canadian crude below global benchmarks in an anomaly expected to cut into fourth-quarter profits in the oil patch.
The short-term aberration, caused in part by new output from the oil sands, comes as energy companies grapple with unprecedented swings that have seen the price of crude soar to a record $147 (U.S.) a barrel in July and sink to a close of $41.70 Thursday.
At times in December, the price of a barrel of West Canadian light crude fell almost $10 below that of benchmark West Texas intermediate crude (WTI), but the gap has since narrowed to about $2.50. The two usually trade at similar prices, or even a slight premium for the Canadian blend.
The hit to fourth-quarter results from the anomaly is not expected to be dramatic, particularly given the much larger issue of the collapse of global prices. As well, pipeline companies are bringing on new projects that will relieve the strain on the system.
“It’s negative for light oil producers as the price hasn’t kept up with WTI,” said David Doig, a Calgary-based analyst with Union Securities Ltd. “It’s not going to be too significant, as the [large price drop] was fairly short-lived, but cash flows will be down.”
Junior producers that produce significant volumes of light crude, such as Galleon Energy Inc., West Energy Ltd. and Highpine Oil & Gas Ltd., could be most affected, he said.
Martin King, a Calgary-based analyst at FirstEnergy Capital Corp., added: “Prices were worse than people would have thought, and the weakness certainly took some companies by surprise. It will have some impact [on fourth-quarter results].”
In part, the fall in price is due to new supply.
Increased oil sands production from two recently completed projects – Nexen Inc.’s Long Lake development and Canadian Natural Resources Ltd.’s Horizon mine – meant two of Enbridge Inc.’s pipelines from Alberta to the U.S. Midwest were oversupplied by 24 per cent in December.
Three Enbridge pipelines will be oversupplied by 6 per cent this month.
That has forced the pipeline company to ration the amount of crude transported on its network. This situation, known as apportionment, has created a backlog, causing the price of West Canadian light crude to plummet. It’s the first time Enbridge has seen apportionment on its system since the mid-1990s, when Alberta’s production also jumped ahead of available capacity.
“We’re seeing extreme price swings and the market has become very volatile,” said Greg Stringham, vice-president of the Canadian Association of Petroleum Producers. “[The Canadian price fall] is major proof of why we need new pipelines.”
The situation could have been worse if Long Lake hadn’t been slower to start up than expected, Mr. Stringham added. Steam-injection wells at the Nexen facility also haven’t produced bitumen as quickly as the company predicted.
While output from the oil sands is expected to increase from current levels of 1.25 million barrels a day to about 2.8 million barrels a day by 2015, producers have long feared that a lack of pipelines could restrict their ability to move crude to markets across North America.
However, December’s apportionment will likely be the worst companies will see for some time. An expansion at an existing Enbridge pipeline should be finished next month, thereby increasing export capacity.
Similar projects are planned by pipeline firms throughout the year, while two major new projects – Enbridge’s Alberta Clipper development and TransCanada Corp.’s Keystone line – will be operational by 2010.
Another factor contributing to Canadian crude price swings is the completion of Petro-Canada’s retooling of its 135,000-barrel-a-day Edmonton refinery to take more synthetic crude from the oil sands, instead of light, sweet conventional Canadian crude.
Effectively, that means some 85,000 barrels a day of Edmonton light, a blend of Canadian crude from conventional oil wells, will have to find a new buyer elsewhere.
The Globe and Mail
January 9, 2009 at 1:17 pm #6363
Here is Update on Canadian (Light Conventional & possibly Sweet Synthetic Crude?) ~ due to mismatch in completion of new supply & lagging of P/L crude export projects, Crude price drop, Refining economics and resulting US supply glut. As article mentions it is going to hurt producers Dec 08 & 4Q08 earnings but is expected to work out.
This probably means some of CA Bitumen Upgraders will shift from making Synthetic Sweet crude & into Heavier Bitumen Blends as displaced CA Lt. Conventional crude seeks markets from its displacement with Canadian refineries like Edmonton Refinery (also stops making anode petcoke for Alcan smelters & becomes fuel coke producer).
This additional short term pressure is going offset all OPEC hype on production cuts (which were already cutback due demand anyway) and make all the crude loading into VLCC storage to wait for higher prices in 2009 ….. a much more risky play.
Don’t you just love it when Universe decides screw with speculators & Murphy helps out with some strange crude anomalies?
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