Oil Sands Truth: Shut Down the Tar Sands

Tar Sands "fetch premium price"

Oil sands crude fetches premium price
NATHAN VANDERKLIPPE
Globe and Mail
Published Wednesday, Mar. 02, 2011

Synthetic crude – produced by oil sands companies such as Suncor Energy Inc., Royal Dutch Shell PLC, Nexen Inc. and Syncrude Canada Ltd. – is fetching a premium of more than $15 over West Texas Intermediate, the benchmark U.S. crude that closed above $100 yesterday for the first time since October, 2008. Historically, the price for synthetic crude has stayed roughly level with WTI.

That means those companies producing synthetic crude are getting more than $115 per barrel of product sold this week, a huge windfall on top of already surging oil prices. Turmoil in the Middle East continues to stir uncertainty in global crude markets – and deliver increasingly fatter margins to oil producers.

Gross revenue for Canadian Oil Sands Trust, for example, which owns 36.74 per cent of Syncrude, is boosted by $31-million for each $1 annual rise in the price of a barrel of crude.

But the Canadian oil patch is now receiving an extra sweetener, thanks to a series of supply disruptions. Fires early this year at two upgrading facilities, one owned by Canadian Natural Resources Ltd. and the other by Husky Energy Inc., have taken out of production roughly 150,000 barrels per day of synthetic crude – creating a shortage of a product that is important for U.S. refineries, who are now bidding up prices.

“It’s basically just reflecting the lack of sweet synthetic supply in the market,” said Siren Fisekci, spokeswoman for Canadian Oil Sands Trust. “It means we’re making more money for our production.”

The gains extend across the oil patch. Last year, Alberta companies produced an average of 879,000 barrels per day of synthetic crude. For those companies alone, a month of prices at the current level could add hundreds of millions of dollars in extra revenue.

Some analysts believe the companies may be profiting not just from upgrader problems, but from the Middle East turmoil as well. The overseas uncertainty that has propelled crude prices in Europe and elsewhere has not been reflected as strongly in the WTI price, which substantially lags Brent, the overseas crude benchmark. But Canadian synthetic crude now appears to be more closely tracking Brent.

Synthetic crude is produced by companies that refine – or “upgrade” – the thick, heavy bitumen of the oil sands into a lighter oil. Not only is synthetic used by refineries to make end products such as gasoline and diesel, but oil sands producers that don’t upgrade their product – such as Cenovus Energy Inc. – buy it to thin their bitumen so it can flow through pipelines.

Companies without upgraders are not benefiting from the current price strength. From January, 2005, to January, 2010, forward-month closing prices for synthetic crude sales tracked by Net Energy Inc. have averaged 58 cents a barrel more than WTI. In February, however, they shot up to $11.95 above WTI. a big change from $2.25 at the end of January. On Wednesday, synthetic sold for $15.90 more than WTI, which market observers say is a record.

However, much of the production is sold based on a monthly weighted average, and March has just begun.

“Clearly, there’s excess demand for synthetic oil,” said Randy Ollenberger, an analyst with BMO Nesbitt Burns. “So there’s probably a legitimate premium. Whether it’s $15 or not, you probably won’t know until the end of the month.”

The strong prices aren’t expected to be a long-term phenomenon, although they may last several months. Husky, which has been working to repair its Lloydminster upgrader since Feb. 2, said Wednesday it won’t be back online until later this month because, according to spokesman Graham White, “due to extreme cold in Lloydminster, we slowed down the repair activities.” That upgrader is currently operating at 40 to 50 per cent of its 82,000-barrel-a-day capacity.

CNRL hopes to resume half-service at its Horizon oil sands mine upgrader by June, which will allow it to restart 55,000 barrels per day of output that has been halted since a fire in January. Full Horizon operations are not likely to recommence until the third quarter.

And more shortages are on the way. Suncor has planned six weeks of major maintenance at one of its upgraders, with 215,000 barrels per day of capacity, starting in May.

The boost in prices is “a bit of a market reaction to a little bit of a restriction on capacity, current and upcoming,” Suncor spokesman Brad Bellows said. “No question, it’s a plus in the near-term.”

That means synthetic crude shortages will likely last for several more months, although it’s not clear how long it will stay at current levels.

“This is not sustainable,” said Stephen Fekete, a managing consultant with international crude consultancy Purvin & Gertz.

But, he said, the prices may not be related solely to Alberta problems. Canadian product is now competing with similar crude blends in places like Louisiana, which have been priced nearer Brent in recent weeks.

“It’s weighting that price more to a Gulf Coast type,” Mr. Fekete said.

http://www.theglobeandmail.com/report-on-business/industry-news/energy-a...

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