In Canada, oil is a surprisingly cheap commodity. A combination of surging production, lower demand due to refinery maintenance and a chronic shortage of pipeline capacity has created a glut in the oil-rich province of Alberta.
The result: this week the cost of Western Canada Select, the regional benchmark, has fallen to less than USD 45 a barrel. Canadian oil companies, including Toronto-listed Imperial Oil and Suncor Energy, are selling their production for a bargain; less than half the near-USD 110 a barrel cost of Brent, the global benchmark, in the London market. You cannot find cheaper crude in the world than that of Canada.
The country's trade balance and currency are suffering as a result. Charles St-Arnaud, economist at Nomura, says that Canadian oil producers are earning CUSD 2.5billion less than they should every month. "This implies to a revenue loss of about CUSD 30 billion a year, or about 1.6 per cent of GDP" of Canada, he says.
The situation is likely to get worse in the first half of 2013 before it improves. On Thursday, the price differential between WCS and West Texas Intermediate, the US benchmark, widened to USD 41 a barrel, the most since December 2007, according to Reuters data. WTI is already trading at a discount of more than USD 20 a barrel against Brent, creating a massive gap of USD 61 a barrel. Even counting the barrels of Iran oil moving in the black market due to sanctions, no other crude is cheaper.
The plunge in the value of WSC relative to other benchmarks comes after Canadian oil production surged above 4m barrels per day in August, the latest data available, for the first time on the back of the oil sands boom. Oil sands are a concentration of a mix of sand, clay, water and viscous crude oil that producers extract using, in some cases, conventional mining techniques. The crude oil is later separated from the sand.
Since 2000 until the middle of this year, oil producers in Alberta, the province where most of the oil sands mines are located, have added 1.4m b/d of new production to the market - equal to the total production a midsized member of the Opec oil cartel, such as Libya. The boom is continuing, with Imperial Oil planning to add another 110,000 b/d in early 2013 with the opening of its Kearl oil sands mine.
With more crude from the oil sands flowing and pipeline capacity unchanged, Canada is likely to remain the bargain basement of the global energy industry.
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