New oilsands production could deepen discount, analysts say
Some projects proceeding despite glut
CALGARY — Thousands of new barrels of oilsands production flowing into the North American oil market could exacerbate the discount Canadian producers get for their crude, analysts say.
ConocoPhillips Canada and Total E&P Canada announced Tuesday that the second phase of their joint venture in the oilsands had begun operations, at a time when global oil markets face a supply glut.
The second phase of their Surmont oilsands project will add 118,000 new barrels of oil production per day, after a ramp-up period. In total, the project is designed to produce 150,000 bpd.
Similarly, Husky Energy Inc. announced Tuesday it had begun steaming at the 30,000-bpd second phase of its Sunrise oilsands project, a joint venture with BP PLC, with first oil expected by the end of the year. Sunrise is designed to produce 60,000 bpd once both phases start producing.
TD Bank economist Leslie Preston said incremental production from the oilsands could affect the price of Western Canada Select, the heavy oil benchmark.
West Texas Intermediate benchmark oil prices have collapsed over the summer after stabilizing around $60 US per barrel in May and June. Over the same period, oilsands producers have seen WCS discounts to U.S. crude briefly widen to $20 US per barrel, before falling back to around $14 US.
However, the additional production of 148,000 bpd from the two projects shouldn’t affect WTI prices, which erased Monday’s gains and fell 7.7 per cent Tuesday to close at $45.41 US per barrel. The main catalyst for WTI oil price movements is output from shale oil plays in the United States.
“People are looking for this big decline in rig counts to translate into actual production declines to see that this oversupply is going to get worked off through adjusting production,” Preston said.
The collapse in prices means ConocoPhillips will not bring additional projects online in Canada until prices stabilize.
“Everything is kind of on pause in this uncertain environment right now,” spokesperson Rob Evans said. “(Surmont phase 2) was a very capital-intensive program and so now we’re moving away from requiring capital to actually providing cash flow.”
RBC Capital Markets analyst Scott Hanold said in a research note Houston-based ConocoPhillips has spent between $800 million and $900 million US on the project this year, but capital outlays should decline to less than $400 million US in 2017. He noted that Surmont’s second phase was the largest steambased oilsands project addition built to date.
While ConocoPhillips is pulling back, Husky will be pumping more heavy oil from northern Alberta in the coming months.
“We are proceeding with several heavy oil thermal projects in the Lloydminster region, so you’ll see them coming online over the next year,” spokesperson Mel Duvall said. “Rush Lake came online last month and we’ve got three other plants coming online over the next year.”
Those three projects will add 24,500 bpd to Husky’s production between now and the end of 2016.
“We continue to see good returns, even at today’s prices,” Duvall said. The additional production from Sunrise will be processed at the company’s refinery in Toledo, Ohio, which would shield the company from spreads between WCS and WTI.
On Monday, FirstEnergy Capital Corp. analyst Martin King updated his firm’s oil price outlook, noting that “wider Canadian lightheavy crude oil spreads are expected” as a result of the fall in WTI prices and more competition for heavy oil refining capacity on the U.S. Gulf Coast.