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Reuters: Canadian oil producers a long way from $100 oil

01.03.08, 4:43 PM ET
(In U.S. dollars)
By Jeffrey Jones

CALGARY, Alberta (Reuters) – World oil prices have broken the magic $100 a barrel mark but Canadian oil producers will have to wait for much of their own fast-growing but lower-quality production to fetch such a lofty sum.

More than 40 percent of western Canadian oil is classified as heavy, and so it is slapped with varying price discounts to benchmark West Texas Intermediate to account for the extra processing it requires and other market forces.

Recently, the discount has been steep.

“Overall, as world crude prices increase, so do the prices here, but they are fully dependent on what that differential is,” said Steve Fekete, a Calgary-based analyst with consultants Purvin & Gertz.

In December, the spread between WTI, the marker grade for the New York Mercantile Exchange, and Western Canada Select, the region’s blend of heavy oil, averaged a gaping $40 a barrel, Fekete said.

A BP Plc (nyse: BP – news – people ) refinery in Toledo, Ohio, a major buyer of Canadian heavy oil, completed a lengthy maintenance shutdown last month and pipeline space allocation issues also affected the market in December, he said.

Today, the discount is about $25 a barrel.

Canada is the largest oil supplier to the United States, topping such others as Saudi Arabia and Venezuela, and companies are in the midst of a spending spree to retool refineries to run more heavy crude, especially in the Midwest.

That is in concert with the expansion of Canadian oil sands output, a pricey and technically difficult effort that now involves most of the world’s oil majors. It has brought with it investments in new pipelines and blending techniques to make the bitumen from the oil sands more versatile as a feedstock.

According to National Energy Board estimates, Canada produced about 2.8 million barrels of oil a day in 2007. Of that, 1.02 million was heavy oil or extra-heavy bitumen from Alberta’s oil sands, and another 707,000 was upgraded bitumen from Syncrude Canada Ltd, Suncor Energy Inc (nyse: SU – news – people ) and Royal Dutch Shell Plc (nyse: RDSA – news – people ) oil sands plants.

A series of operational mishaps at upgrading plants run by the oil sands producers in late 2007 pushed up prices for the synthetic crude.

Newfoundland’s three offshore projects, Hibernia, Terra Nova and White Rose, produced 388,000 barrels a day.

That leaves just over 500,000 barrels of light oil production, the highest quality crude, in Western Canada, and that number is projected to keep dropping as reserves are tapped out.

This week, benchmark light oil hit, then topped, $100 a barrel for the first time, driven by a combination of falling inventories in the United States, the world’s biggest consumer, and geopolitical tension.

It settled down 44 cents at $99.18 a barrel on Thursday, but many analysts do not expect upward pressure to ease soon.

Much of Canada’s heavy crude will likely fetch 65 percent to 70 percent of price, due to the lower quality and high fixed costs, EnCana Corp (nyse: ECA – news – people ) spokesman Alan Boras said.

His firm produces 134,000 barrels a day of crude, some of it as part of an oil sands production and refining joint venture with ConocoPhillips (nyse: COP – news – people ), aimed at matching supply with markets. Others firms have forged similar deals.

“We have thick, heavy barrels that are buried in sand, and they need a lot of capacity and capital investment to get them out, additional blending to get them to market and then we’re a ways away from those markets, so there’s transportation on top of that,” Boras said.

“So $100 isn’t exactly as it appears.” (Reporting by Jeffrey Jones; Editing by Rob Wilson)

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