“We can develop Fort Hills and Joslyn without upgrading,” said Andre Goffart, chief executive officer of Total’s Canadian unit, in a phone interview from Calgary on March 28. “We are looking to ship some products to the U.S. Gulf Coast, but also to Asia as well, because we think that Asia in the future will be an important customer for oil sands.”
Calgary-based Suncor and Total are among several Canadian producers eyeing sales of oil-sands crude to refineries on the U.S. Gulf Coast and in Asia. The raw product can more easily compete with heavy oils from Mexico and Venezuela, instead of facing a tide of cheaper light U.S. supplies.
U.S. light oil production jumped 16 percent to 7 million barrels a day in 2012, according to the U.S. Energy Information Administration. Increasing production on both sides of the border caused pipeline congestion late last year that saw Canadian oil fall to a discount of more than $8 barrel for light oil and more than $40 for heavy oil.
‘Challenging Economics’Canadian prices recovered in March due to temporary production outages in Canada and a seasonal increase in U.S. demand as refineries return from maintenance, Philip Skolnick an analyst with Canaccord Genuity Corp., said in a phone interview from New York on March 28.
“A lot of the increase is short term in nature. There’s going to continue to be a ramp-up in light oil and therefore that hurts the economics of an upgrader,” Skolnick said. “Most of the pipelines that are planned, like Keystone XL, are going to benefit heavy oil more, so that’s another reason that’s going to make an upgrader less attractive.”
Suncor rose 4 cents to C$30.44 at the close in Toronto on March 28, following its after-market upgrader announcement a day earlier, amid a broader decline in Canadian energy stocks. It was up 0.6 percent at C$30.62 today.
Costs Surge“Suncor’s stock moving up may signal people felt that project may have been marginal to start with,” Leo de Bever, who oversees C$70 billion in assets as CEO of Alberta Investment Management Corp. including Suncor shares, said in a phone interview on March 28. “Given the competition for cheap, light oil, producing a light oil product in Alberta is not going to be competitive with existing technology.”
Sneh Seetal, a Suncor spokeswoman, didn’t return e-mails and phone calls seeking comment on the company’s decision to scrap the upgrader.
Building upgraders in Alberta has become difficult after costs to build the facilities skyrocketed 70 percent from 2000 to 2008, according to a March 27 report from IHS CERA. Only three of 11 upgraders that had been proposed before the recession of 2008 have been built, with the rest having been scrapped or put on hold, the energy consulting firm said.
A new upgrader needs U.S. oil prices from $86 to $130 a barrel to break even, according to a March 19 report report by ITG Investment Research, a unit of the New York brokerage Investment Technology Group Inc. (ITG) That compares with $82 to $100 a barrel for oil-sands projects that produce raw bitumen. West Texas Intermediate oil futures closed at $97.23 a barrel last week on the New York Mercantile Exchange.
‘Highly Refined’Upgraders that are already built will continue to be profitable, because they produce a high-quality light oil and don’t have to pay off construction costs, said Marcel Coutu, chairman of Syncrude Canada Ltd. Syncrude is one of the largest and oldest upgrading projects in Alberta, and produced 104.9 million barrels last year.
“I wouldn’t hazard a guess to what other sources of oil, be they light shale oil or other oil sands, that we’ll have to compete with,” Coutu said in a phone interview on March 28. “We just have a very competitive product that is highly refined going into refineries that convert it into middle distillate products like diesel and jet fuel, which continue to be in high demand.”
Coutu said Syncrude’s future expansion, which won’t come until next decade, won’t include an upgrader. Unlike its existing operations, the proposed Aurora South mine would sell 200,000 barrels a day of unprocessed bitumen.
Margin SqueezeSuncor and Canadian Natural Resources Ltd. (CNQ) are two other companies that own upgraders but are planning future oil-sands expansions without them. Including its Fort Hills and Joslyn projects with Total, Suncor is also developing its Firebag and MacKay River projects to produce raw bitumen. Canadian Natural is developing several bitumen projects including the Primrose and Kirby projects in northern Alberta.
“We have too much light, sweet crude - which is what upgraded synthetic crude effectively is - and if anything we have too little heavy crude,” Suncor Chief Executive Steve Williams said on the company’s Feb. 6 fourth-quarter earnings conference call. “Our view is that, that will cause a squeeze on upgrading margins and make it a challenge.”
Stocks UnderperformThe company reported a loss of C$562 million in the fourth quarter, or 37 cents a share, the biggest in at least two decades after recording a C$1.49 billion charge for Voyageur. That compared with net income of C$1.43 billion, or 91 cents, a year ago. Operating earnings fell 30 percent to C$1 billion while revenue dropped to C$9.44 billion from C$9.91 billion.
“Bay Street’s energy stocks, while ahead on the year, have underperformed their Wall Street counterparts, hurt by concerns over future pipeline capacity and competition from growing U.S. production,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, wrote in a March 28 note.
The 58-company Standard & Poor’/TSX Energy Index (S5ENRS) has risen 0.4 percent in 12 months through March 28 compared with a 9.4 percent gain for the S&P 500 Energy Index which tracks the share performance of 43 U.S. energy stocks, according to figures compiled by Bloomberg.
Canadian Natural is still planning to proceed with a C$5.7 billion upgrader near Redwater, Alberta, though it has government support and a niche market for its product. The Alberta government will contribute 75 percent of the bitumen supply for the upgrader and cover costs of servicing the debt used to finance its construction.
The facility won’t be competing with rising light oil volumes because it will produce diesel, in short supply in western Canada due to growth in the “energy-intensive” natural resource industry, Mike Dunn, an analyst at FirstEnergy Capital Corp. in Calgary, said in a February report.
New upgraders won’t be built until producers “figure out better ways of doing it, more economical ways,” AIMCo’s de Bever said. “Maybe it’s not bad that we have a pause.”