CALGARY, Alberta (Reuters) - Benchmark Canadian heavy crude prices crashed below $20 a barrel on Wednesday, the lowest in at least a decade, piling more woe on one of the world's highest-cost oil patches and driving much of the sector deeper into the red.
With variable cash costs at some of the largest of Alberta's vast oil sands operations estimated at above $40 a barrel, the 14 percent plunge in outright Canadian heavy prices this week may finally force some weaker players to consider shutting down operations rather than racking up losses on every barrel they extract, analysts said.
On Wednesday, U.S. crude futures CLc1 slid nearly 6 percent to as low as $33.77 after data showed the biggest weekly build in gasoline stocks since 1993.
Western Canada Select (WCS) heavy blend crude for February SHRWCSMc2 delivery traded at a discount to WTI of around $14.05, according to Shorcan Energy brokers, putting the absolute price of the Canadian oil sands benchmark blend as low as $19.72 a barrel. It had averaged $23.57 in December.
The sharp price slump was the latest bad news for oil sands operators who have watched the price of their crude, among the world's cheapest because of its difficult-to-refine density and high cost of transportation to the main U.S. buyers, plummet from more than $85 a barrel in 2014.
"This is a very, very harsh reality for heavy oil producers," said Judith Dwarkin, chief economist at RS Energy Group in Calgary. "They are - as they spent most of last year doing - trying to survive by cutting costs, increasing production to generate cash flow and borrowing if they can."
Northern Alberta's vast oil sands hold the world's third-largest crude reserves but carry some of the highest production costs globally due to energy-intensive production.
Most companies will likely keep producing even if the crude price does not cover cash operating costs, cushioned in small part by the Canadian dollar's fall to a 12-year low versus the U.S. greenback. The companies sell their crude in U.S. dollars but pay costs in loonies. [CAD/]
Royal Dutch Shell (RDSa.L), whose Albian Heavy Synthetic crude produced at its Scotford, Alberta, upgrader was trading at an even deeper $15.55 per barrel discount to U.S. crude on Wednesday, is not considering slowing or shutting down oil sands production, said spokesman Cameron Yost.
"We believe in the long-term fundamentals of the industry, and these are operations that have long operating life spans of 30 to 40 years," he said. Shell also produces light synthetic crude, which trades at a higher price, and sends most of its output to its nearby Scotford refinery.
But others could be running out of options, according to Barclays oil analyst Warren Russell.
"There may be situations where people are either reaching the end of the line on their capital available or have an outlook that's particularly bearish. If you were in that camp, there's potential you could shut in production," he said.
A January presentation released by producer Canadian Oil Sands Ltd COS.TO, which is fending off a hostile takeover bid from competitor Suncor Energy (SU.TO), showed the average breakeven U.S. crude price at 10 of the biggest oil sands projects is $41 a barrel.
The analysis includes mining and upgrading projects such as Imperial Oil's (IMO.TO) Kearl facility, which produce higher-priced light synthetic crude oil SHRSYNMc2. But even most of those projects are in the red at current prices.
For producers of heavy Canadian grades aside from WCS, the economics are even worse. Sour crudes such as Cold Lake, produced by companies including Imperial and Cenovus Energy (CVE.TO), and Access Western Blend, produced by MEG Energy (MEG.TO), typically trade another $1-$2 a barrel lower.
Editing by Jonathan Oatis