Canada's oil sands to remain unhurt by falling crude prices

Canada's oil sands to remain unhurt by falling crude prices

Oil sands in Fort McMurray, Alberta.

For the first time in four years Canadian oil sands producers are not afraid of what the upcoming winter will do to crude prices as revamped US refineries are already absorbing their production and new oil-rail terminals are ready to deliver it to markets across North America.

Traditionally, Canadian producers’ limited export pipeline capacity coupled with the end of the U.S. summer driving season has led to oil surpluses in Alberta, sending prices down and restricting producers potential revenues.

Not this year, predict the companies that mine and drill the world's third-largest crude reserve.

"There's an impression that the oil sands is the marginal barrel," Brian Ferguson, chief executive of Cenovus Energy Inc, one of the country's largest oil sands developers recently told Reuters. "Yes, some of the projects are more marginal but the majority of the big producing projects, the majority of the resource, is very economic."

Price watch

After U.S. oil tumbled to its lowest prices in nearly two years early this month, a sudden slump in prices this winter would be particularly unwelcome. At around $79 per barrel, the absolute price in Canada is getting nearer the break-even cost for major new developments.

Lorraine Mitchelmore, the president of Royal Dutch Shell Plc's Canadian unit, which operates a mining and upgrading project in the Alberta oil sands, said last month that Brent below $70 per barrel would be "a challenge." But she told Reuters that she sees no risks to production at current prices.

So far, Canadian crude is holding up well around $13.50 per barrel under West Texas Intermediate, the U.S. benchmark crude. The index fetched about $93 a barrel last week, the slimmest differential since July 2013.

Looming threats

But while oil sands producers seem optimistic, a few of the factors behind the winter slump in Canadian crude prices remain: North American refiners still close for maintenance in the fall, thwarting demand for crude. Road construction also tends to fade, which lessens the demand for asphalt, a by-product of refining heavier oil sands crude.

Congestion in exports pipelines tends to worsen during cold weather, as oil sands bitumen can get more viscous than usual, forcing producers to blend in a higher proportion per barrel of ultra light oil.

“Pipeline bottlenecks will continue to occur,” Douglas Proll, executive vice-president at Canadian Natural Resources Ltd. said earlier this month at a panel discussion about the oil sands at an energy conference in Toronto.

However, talk of new plans east, west and south, as well as rail will see heavy oil differentials remain modest “even as we enter the traditional low demand of heavy oil of the months of December, January and February,” Proll added.

The U.S. Department of Energy expects oil imports to decline to 21% of total consumption — its lowest level since 1968. And while Canada has managed to increase its market share in neighbouring country, Canadian light oil and heavy needs to find new markets.