Mercury Rising 鳯女

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Keystone XL’s Window Of Profitability Closing

Posted by Phoenix Woman on December 17, 2012

Crude Oil Prices as of 12-14-12

In a recent edition of the Oil and Gas Investments Bulletin newsletter, I saw the following statement:

Canadian heavy oil actually traded under $50/barrel this week—less than half the price of Brent-priced international crude. It is by far the cheapest crude on the planet right now.

(The industry calls these discounts “differentials”—they would say “the WCS Select differential blew out to $37.50, even $38 today.” This translates into “The Canadian heavy oil benchmark price traded $38 below WTI today.”)

These low prices are from the big increases in oilsands production filling up the pipelines and the refineries in North America—despite the fact that more refineries are switching over their processes to handle more heavy crude.

In fact, fast growing oilsands production is also causing a discount for other Canadian oil producers as well.

Canadian heavy crude under $50 a barrel? The stuff costs around that much just to get it out of the ground. That’s not a profitable state of affairs for tar sands exploiters. In fact, an article from February 2012 in the Toronto Globe and Mail has this passage (bolding mine):

Just how close new oil sands projects are to being a dicey investment proposition is an open question. For competitive reasons, some major companies – such as Imperial Oil Ltd., developer of the mammoth $30-billion Kearl megaproject – aren’t forthcoming on the oil prices needed to earn a decent return.

But the National Energy Board, culling through publicly available data from the industry, recently pegged the minimum price needed for new projects to be commercially viable at $85 to $95 (U.S.) a barrel.

“It’s the world’s most expensive oil,” said Andrew Logan, head of the oil and gas program at Ceres, a Boston-based organization that promotes sustainable investment and corporate governance.

So the Keystone XL people need the market price for crude oil to stay, at a bare minimum, above $85 a barrel — and right now, per the Yahoo! Finance sidebar graphs at The Oil Drum, it’s hovering around the $84 to $86 mark. (See also the chart at the top of this post.) In fact, it’s quite likely that — for a short time at least — crude oil prices could drop to as low as $50 a barrel.

I poked around online a little, and sure enough, I found more evidence that this is starting to hurt the companies exploiting the Canadian tar sands. Check out this Bloomberg News piece dated December 6, 2012:

Suncor Energy Inc. (SU) Chief Executive Officer Steve Williams said the profit margin for processing bitumen from Canada’s oil sands is “disappearing” as the company reviews a joint project with partner Total SA. (FP)

Why the drop in oil prices — and in profitability for Canadian tar sands mining? A key reason is that the Bakken Formation in North Dakota and Montana is producing tons (literally) of light sweet crude, which requires far less processing once it’s out of the ground, thus making it very desirable for refiners worldwide.

I predicted nearly a year ago that the Keystone XL was going to be doomed because it would wind up being economically unfeasible; I thought at the time that the bursting of the Chinese real-estate bubble is what would do the trick, and perhaps the drop in activity caused by the bubble led to 2012 being the year with the lowest growth in Chinese oil consumption since 2002. But it looks like the unexpectedly high output — and high quality — of oil from the Bakken will be the biggest factor in Keystone XL’s demise. (And no, the Keystone folks weren’t ever going to be shipping that oil from Canada to China, as they kept threatening to do — not when there’s not a single port on Canada’s Pacific shore that can handle supertankers.)

(Crossposted to MyFDL.)

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