Canada's Crude Reality


The price of Canadian heavy oil recently fetched a near-record discount of more than $40 per barrel against its U.S. benchmark of West Texas Intermediate oil. While Enbridge's decision to ration capacity on two of its U.S. transport lines due to a power outage was the cause of the most recent decline, that's not the root cause.

The key problem continues to be the lack of takeaway capacity, especially in the oil sands of Alberta. While there are some developments on the horizon, it's a problem that's not going to be fixed anytime soon. Instead it's likely to get worse as even more production comes online. Does that means it'll be a tough 2013 for Canadian oil producers?

It has been a rough year for investors of Canadian Natural Resources . The company's stock is down more than 20% as earnings are expected to decline 30% from what the company delivered in 2011. Looking to the year ahead, the company doesn't see the the spread impacting it's bottom line to the same degree. Instead, it sees the WTI to Western Canadian Select heavy oil differential tightening to an average of $17.87 per barrel over. Catalysts like the 20% increase in heavy oil refining capacity, along with the reduction in pipeline constraints, will begin to come only in late 2013 to help Canadian producers.

That refining capacity will come from the completion of BP's Whiting, Ind., refinery in April. The $4 billion project included a new 120,000 barrel per day coker unit that's key to processing Canadian crude. While the project has been hit by delays it is now on track to come online in April.

Increased refining capacity and pipeline projects will help, but continued and increased production is still likely to keep Canadian crude prices depressed. There are several production projects coming online this year, including Imperial Oil's Kearl project. which is expected to produce at 110,000 bpd, while Suncor Energy is raising the production from its Firebag 4 facility by another 60,000 bpd. The list, unfortunately for producers, doesn't stop there.

That's causing cautiousness among producers to think twice about further expansion. Several have already announced capex reductions, with Suncor already slicing a couple hundred million dollars off its 2013 spending plan and hinting that more cuts are possible. Even as Canadian Natural Resources sees a better 2013 for spreads, it is maintaining flexibility with $2.9 billion of its $6.9 billion capital plans to be reallocated if necessary.

The reality is that until more pipelines come online, 2013 likely won't offer much relief for Canadian producers. Relief's not likely until mid-2014 when the first phase of Enbridge's 400,000 bpd expansion project comes online. That doesn't mean there isn't still money to be made in oil.

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