If U.S. oil producers thought they had problems when oil closed last Thursday at a 13-year low of US$26.21 per barrel, “the headwinds facing Western Canada’s heavy oil sands these days would try the patience of a saint,” analyst Sandy Fielden argued on the RBN Energy blog.
While most grades of oil are priced according to the West Texas Intermediate (WTI) or Brent pricing benchmarks, Alberta crude sells at the steeply discounted price of Western Canadian Select (WCS), described by RBN as a mix of 19 heavy conventional and bitumen crudes blended with sweet synthetic crude and diluents.
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WCS was priced as low as US$12.50 per barrel in January, rising to $14.06 on February 10. That means tar sands/oil sands producers are losing more money with every barrel of oil they deliver to market—the gap between production costs and income is even bigger than it would be if they were selling at world prices.
“By the time gathering, transport, and diluent purchase costs are subtracted, the netback (market price less transport cost) at the lease is negative for many producers—especially when shipping by rail,” Fielden writes. “To be clear, that’s below zero at the wellhead!” Yet there’s little sign so far that Alberta producers are prepared to scale back production—partly because it would cost them even more to “risk permanently damaging carefully engineered reservoirs, underground deposits of millions of barrels of tarry bitumen,” Reuters wrote last week.
Canada’s fossil industry insists the solution to its production woes is to build a pipeline to get product to “tidewater”. But Fielden points to the flaw in a strategy that ultimately depends on getting oil from Alberta to refineries on the United States Gulf Coast.
“Even if pipeline capacity was available on that route—which it is not—the length of the journey means increased transport costs, at a time when market prices are already painfully low,” he writes.
Canada shipped crude to the Gulf Coast in record volumes last year, posting a 73% increase over 2014 in the first 11 months of 2015. “But from a pricing perspective, getting Canadian heavy crude to the Gulf Coast does not increase its market value a great deal.” Gulf Coast pricing is based on Mexico’s heavy Maya crude that was selling for $21 per barrel last Thursday, just $7 more than WCS. That premium doesn’t cover the cost of piping the product, “meaning that Canadian producers have to swallow additional transport costs to compete with Maya,” Fielden notes. (h/t to The Energy Mix subscriber Shelley Kath for pointing us to this story)
