The price oil sands producers receive fell to $38 a barrel below the international benchmark after a $3.50 widening to $14.75 of the spread between the price of Western Canada Select – a blend of heavy oil sands crude and conventional oil – and US crude.
The drop in Canadian heavy oil came as the US benchmark West Texas Intermediate (WTI) discount to the global oil price in the form of North Sea Brent widened to $22.80 – the biggest gap in almost a year and approaching a record margin of $26.87 in early September 2011.
Brent settled at $111.75 in Europe – an almost 10% decline this year – which translates to an effective price for bitumen-derived oil from Alberta's oil sands of less $73.45 a barrel.
Monday's sharp drop-off and the declines last week in the price of Western Canada Select (WCC) marks a reversal of steady gains made by the commodity since hitting multi-year lows of $35.75 below WTI on March 7. In September last year the discount was only $8.00.
The value of Syncrude, a light oil made from oil sands after undergoing an expensive upgrading process, also plunged on Monday to $5.75 above WTI from $9.25 before.
The problems of oil sands producers are being blamed on increasing supply from Alberta where production is set to more than double to 3.7 million barrels per day by 2025 out of a total of 4.7 million for the whole of Canada. 99% of Canada's current crude exports of 2 million barrels per day end up in the US.
The lack of pricing power by oil sands players is often blamed on the fact that they cannot access new markets in Asia as pipeline projects languish in a regulatory morass.
Even if TransCanada’s (NYSE:TRP) Keystone XL finally crosses the border into Canada, Enbridge’s (TSE:ENB) Northern Gateway pipelines is built – an ever diminishing prospect – or Kinder Morgan receives approval to twin its pipeline going into Vancouver, Alberta producers still face an uphill struggle to compete.
Bitumen is expensive to extract, upgrade and refine and cannot compete with the many new shale oil plays which have pushed US production to its highest level in a decade.
Production in the US particularly from the Bakken basin – unlike WCC Bakken oil attracts a premium to WTI – in North Dakota will see the country ramp up current output of 7.8 million barrels/day to 10.9 million barrels over the next few years. Bakken is also competing for pipeline and refinery contracts with Alberta.
Apart from the boom in US production, and a strong currency, Alberta's oil sands players are also threatened by escalating costs according to a recent report by Wood Mackenzie. According to the research company "break-even costs for building new steam-driven projects are in the $65-$70 a barrel range and mining developments need at least $90-$100 oil."
Existing project can still make money at $45 a barrel and at today's prices SAGD or steam-assisted gravity drainage projects still stand a chance to get off the drawing board, but a full fifth of oil sands projects – those that rely on conventional mining methods – are not nearly viable.