Even if U.S. President Barack Obama
approves the Keystone XL pipeline, Canadian crude oil probably
will remain the cheapest in the world, hampering expansion of
the country?s largest export industry.
Canadian oil prices are forecast to fall compared with
world benchmarks because production from oil sands, fields of
sand coated with heavy oil beneath about 90,000 square
kilometers (34,749 square miles) of boreal forest in northern
Alberta, is estimated to more than double to 3.8 million barrels
a day by 2022. Keystone, the 1,179-mile link from Alberta to
Nebraska first proposed in 2008 and delayed in part by
environmental activists, would only briefly relieve the glut.
?Keystone will help alleviate the lack of pipeline
infrastructure but only temporarily,? David Bouckhout, a senior
commodity strategist at TD Securities in Calgary, the securities
unit of Canada?s second-largest bank, said in a telephone
interview. ?Growth of supply on both sides of the border,
Bakken and Canadian supply, will outpace what Keystone?s
capacity will provide in likely two to three years.?
The prospect of prices staying below other types of crude
oil risks undermining investment in the Alberta oil sands, the
world?s third-largest reserves and the U.S.?s biggest source of
imports. Companies from Exxon Mobil Corp. (XOM) to Canadian Natural
Resources Ltd. (CNQ) lost a combined C$2.5 billion ($2.45 billion) in
revenue last year on lower prices, according to Houston-based
PPHB Securities LP. Oil-sands investment fell 10 percent last
year to $20.4 billion, Alberta?s Energy Resources Conservation
Board said.
Supply Glut
Canada refined about 1 million barrels a day of its crude
output last year, leaving 2.3 million to be exported. Domestic
demand will grow by 346,000 barrels a day by 2020 if Canadian
regulators approve pipelines to the country?s eastern provinces,
while production will grow by 1.6 million over the same period,
according to a June 5 forecast by the Canadian Association of
Petroleum Producers. That means at least 1.3 million barrels of
extra production will need to move out of the country by then.
The four existing routes from Alberta to the U.S. West and
Midwest have a combined capacity of 3.7 million barrels a day,
more than the 3.2 million barrels a day Canada produced last
year, of which 55 percent was from the oil sands. Some of the
lines carry extra supplies from North Dakota, which pumped
663,000 barrels a day in 2012, Energy Information Administration
data show.
Additional Supply
In addition, about 799,000 barrels a day of North Dakota
and Canadian output is due to come online in 2013 and 2014,
according to CAPP and the U.S. Energy Information
Administration, sopping up almost all of the 830,000-barrel-a-day capacity that Keystone would add if it starts up as proposed
in 2015.
?Once we get Keystone in place, that will not be the
answer,? Greg Stringham, CAPP?s vice president of oil sands and
markets, said in a June 5 interview from Calgary. ?It may hold
us off for a couple of years, but it?s clearly not going to be
the long-term answer.?
Western Canadian Select, or WCS, swaps for 2019 were priced
at $61.74 a barrel, or $19.94 below similarly-dated West Texas
Intermediate, the U.S. benchmark grade, at 2:30 p.m. today,
according to the Bloomberg Fair Value Index. Mars Blend, a
medium-density, high-sulfur crude produced in the U.S. Gulf of
Mexico, was at $83.55 a barrel. Dubai crude, the benchmark Asian
grade, was valued at $86.42.
Output Growth
Total Canadian production is forecast to grow more than 50
percent to 4.9 million barrels a day by 2020, while U.S. output
expands 37 percent to 11.1 million barrels, the International
Energy Agency said in its World Energy Outlook in November.
Canadian output jumped 38 percent over the past 10 years,
according to the National Energy Board, the federal energy
regulator.
Canada?s export capacity will have to double to more than 8
million barrels a day by 2030 should production expand at the
rate predicted by CAPP. Even if all the current pipeline
projects are approved, additional capacity of more than 1
million barrels a day will be needed from 2025.
?That?s really just 13 years from now, and in pipeline
years that?s not a long time,? Stringham said.
The $5.3 billion project, connecting Hardisty, Alberta,
with Steele City, Nebraska, was rejected by Obama in early 2012
because it was to be laid across the environmentally protected
Sand Hills Grassland and Ogallala Aquifer areas. The president
expects to make a decision on the re-routed line, now to run
about 100 miles to the east of the Sand Hills, sometime this
year, North Dakota Senator John Hoeven, a Republican, said after
meeting the president in March.
Environmental Concerns
Environmental groups say the line shouldn?t be built
because of the risk of spills and because it would increase
pollution by encouraging development of the oil sands, from
which is extracted bitumen, a thick, tar-like form of oil that
flows like cold molasses at room temperature.
Emissions from the production and use of the sands are 8
percent to 37 percent higher than from oil, according to the
Calgary-based Pembina Institute, a non-profit environmental
research and advocacy group.
TransCanada Corp. (TRP), the builder of the line, aims to
complete a $2.3 billion southern pipeline between Cushing,
Oklahoma, and Nederland, Texas later this year that would take
oil delivered on Keystone XL to refineries on the Gulf Coast.
Lacking Capacity
?We are out of pipeline capacity right now,? Peter
Howard, chief executive officer of the Canadian Energy Research
Institute, a non-profit energy economics and environment
research group in Calgary, said yesterday by telephone. If
Keystone is delayed further, ?the political fallout from that
is going to sour the relationship between Canada and the U.S.
for sure.?
Canada is increasingly reliant on revenue from oil. Energy
products were the country?s fastest-growing export over the past
20 years, rising to 23.2 percent of all shipments, from 9
percent in 1993, data from Statistics Canada show.
WCS dipped to a record discount of $42.50 a barrel to WTI
in December as pipelines reached capacity. The grade recovered
this month as maintenance at oil-sands upgraders reduced
production and as BP Plc (BP/) prepared to start the largest crude
unit at the Whiting, Indiana, refinery, after converting it to
process mostly heavy Canadian oil. August WCS was $17.25 below
WTI at 3:59 p.m. New York time today. It has traded at an
average $22.29 a barrel discount from 2012, compared with $13.69
in the previous three years, according to data compiled by
Bloomberg.
Hurting Revenue
Alberta?s government said it will run a deficit in the
coming fiscal year as it collects C$6 billion less revenue than
it expected, forcing cuts in services and the use of reserves
from a provincial wealth fund. Steve Laut, president of Calgary-based Canadian Natural Resources Ltd., cited the price decline
as a reason for a drop in first-quarter cash flow on a May 3
conference call.
?The resulting uptick in heavy and upgraded light oil
supply is overwhelming local refining demand and pipeline
takeaway capacity,? analysts at Goldman Sachs Group Inc. led by
Arjun Murti in New York said in a note to clients June 2. WCS
will average $27 less than WTI next year and $41 a barrel
cheaper in 2015 if Keystone is delayed or the bottleneck
worsens, the analysts said.
A decision blocking Keystone would reduce spending on oil-sands projects by about $9.4 billion between 2014 and 2017, Dan MacDonald, an RBC Capital Markets analyst, wrote in a note to
clients May 27.
Overwhelm Demand
North America?s growing supply of shale and oil-sands crude
will overwhelm demand unless it?s exported, according to Jackie
Forrest, the senior director of global oil research in Calgary
at IHS CERA, an energy markets research firm based in Englewood,
Colorado. The U.S. will be able to consume as much as 5 million
barrels of its neighbor?s crude, she said.
?Sometime between 2020 and 2030, the Canadian oil sands
will need other markets than the U.S.,? Forrest said. ?Even
then the vast majority of supply can fit into the U.S. market,
because the refineries on the Gulf Coast and potentially
California are so well fitted to process that heavy crude.?
Additional routes are under consideration. TransCanada is
studying the conversion of a line from gas to oil that would
transport as much as 1 million barrels a day of light oil to
refineries in eastern Canada. Enbridge Inc. (ENB)?s Northern Gateway
line would bring as much as 525,000 barrels a day of heavy oil
to Kitimat, British Columbia, for overseas shipment as soon as
2017. Kinder Morgan Energy Partners LP (KMP) plans to almost triple
the size of its Trans Mountain pipeline from near Edmonton,
Alberta, to Vancouver to 890,000 barrels a day, by 2017.
?Even with Keystone XL there has to be some other method
of getting oil out of Canada? if Keystone is rejected, Michael
Formuziewich, who helps manage C$2.2 billion at Leon Frazer and
Associates Inc. in Toronto, said in a June 4 phone interview.
To contact the reporter on this story:
Edward Welsch in Calgary at
ewelsch1@bloomberg.net
To contact the editor responsible for this story:
Dan Stets at
dstets@bloomberg.net
Enlarge image
CAPP?s Vice President of Oil Sands and Markets Greg Stringham
F. Carter Smith/Bloomberg
Canadian Association of Petroleum Producers vice president of oil sands and markets Greg Stringham said ?It may hold us off for a couple of years, but it?s clearly not going to be the long-term answer.??
Canadian Association of Petroleum Producers vice president of oil sands and markets Greg Stringham said ?It may hold us off for a couple of years, but it?s clearly not going to be the long-term answer.??Photographer: F. Carter Smith/Bloomberg
May 31 (Bloomberg) ? Russ Girling, chief executive officer of TransCanada Corp., talks about the outlook for the company?s proposed Keystone XL oil pipeline.
Girling spoke in an interview with Peter Cook for Bloomberg Television?s ?Capitol Gains,? which airs June 2. (Source: Bloomberg)
Article source: http://www.bloomberg.com/news/2013-06-18/keystone-seen-failing-to-sop-up-canada-oil-glut.html
Source: http://invadecanada.us/news/2013/06/19/keystone-seen-failing-to-sop-up-canada-oil-glut/
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