Oil: Alberta's impossible equation

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12/04/2018 | 03:22 pm
Alberta is home to not only two of Canada's largest cities, Calgary and Edmonton, and vast wilderness. It is also a major oil producer, with the highly controversial exploitation of huge oil sands fields. An expensive oil to extract, with a high environmental bill, sold at a discount price. Explanations.

The fall in oil prices that started in October weighs on some producers, particularly those with the highest production costs. On the front line, non-conventional oil producers pay the highest price. Contrary to popular belief, American shale oil producers are not the most vulnerable, as they are increasingly competitive thanks to ever more efficient hydraulic fracturing techniques. Concerns are more focused on Canadian players, who exploit the huge oil sands deposits, mainly located in northeastern Alberta.

As a reminder, Canada is rising to fourth place among world producers in 2017 with production of about 4.8 million barrels per day (mbd), the majority of which comes from Alberta's oil sands (approximately 3.7 mbd), which - a fact that is little known - contains the world's third largest reserves.

With little media coverage, the Canadian oil industry is going through a deep crisis due to a lack of infrastructure that prevents it from selling its oil at "market" prices. We can thus speak of a double penalty for this sector, which accumulates significant production costs for delivery prices that are far below standards.

Significant production costs: hydrocarbons from oil sands deposits require a long process to extract them. Energy-intensive, it is expensive because it requires an astronomical amount of diesel to operate huge machinery and abundant natural gas to separate raw bitumen from the sand and clay in the deposits. The break-even points are therefore not relatively high, ranging from USD 55 to 65 per barrel (in WTI equivalent) for the most economical extraction techniques.
 
Examples of various oils classified by degree of API and sulfur content Source Valeo Energy


Discounted delivery prices: Alberta's oil from the oil sands is heavy and highly corrosive. They are indeed characterized by a low API for a significant degree of sulphur (see above for Western Canada Select and Cold Lake references). They are therefore expensive to refine, hence the fact that they are traded at discounts compared to lighter crude oils.

Nevertheless, this quality observation is combined with logistics problems that weighs on Canadian oil prices. Currently, more than 95% of Canadian crude oil exports are destined for the American market (US refiners need heavy oil to blend with shales oil, which is too light to establish their product mix). However, due to a lack of infrastructure and new pipelines, the province produces more than it exports. Indeed, many pipeline projects are currently suspended or even simply rejected. These include the expansion of the Trans Mountain oil pipeline (which was supposed to triple Alberta's oil flow to the Pacific), stopped by the Federal Court of Appeal, and the gigantic Keystone XL pipeline (linking Canada's province to the Gulf of Mexico), once again suspended by the Montana federal court.

As a result, Canadian crude oil inventories have exploded to an estimated 35 million barrels, double the average. This overabundance of oil has led to a real drop in Canadian reference prices, which have approached the level of 10 USD per barrel (versus a WTI of 55 USD).
 
The spread between the Canadian and American benchmark has widened considerably, with the WCS trading at USD 30 less than the WTI.

Faced with this problem of oversupply and the inability of Canadian and American authorities to develop new pipelines, Alberta Premier Rachal Notley announced the imposition of production quotas as a temporary measure to relieve domestic stocks. The province's production is expected to be cut by 325,000 mbpd, a reduction of about 10%, a major measure justified by losses in the Canadian economy of about $60 million per day on these price levels. The rail transport of Canadian crude oil, a more expensive but also a more polluting solution, is also being seriously considered. Everything is being done to get the oil industry out of this crisis, at any cost.
Jordan Dufee
MarketScreener.com 2018
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