UPDATE 1-Canadian crude prices tumble on new supply, lack of pipelines

Thu Dec 13, 2012 4:42pm EST
 
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By Scott Haggett
    CALGARY, Alberta, Dec 13 (Reuters) - Canadian crude prices
tumbled on Thursday as the differential between heavy oil and
the WTI widened to the most in five years, with substantial
improvement not expected for months on rising supply and a
shortage of pipeline space.
    According to Shorcan Energy Brokers, Western Canada Select
blend heavy oil for January delivery last traded at $41 per
barrel less than the West Texas Intermediate crude price
benchmark, the lowest since December, 2007. 
    The price drop appears to confirm fears there will not be
sufficient pipeline capacity for increasing output from the oil
sands. With space on lines already restricted, a massive new
source of supply is expected to hit the market next month, as
Imperial Oil Ltd opens its Kearl oil sands mine, which
will produce 110,000 barrels per day of pipeline-ready heavy
crude oil.  
    "We've been talking about this for a while, that the fourth
quarter (of 2012) would be the pinch point where things get
pretty awful," said Andrew Potter, an analyst with CIBC World
Markets. "And things very well could get a little worse in
January and February as Kearl hits the market and other volumes
continue to grow."
    Along with new oil from Kearl, Suncor Energy Inc 
said earlier this month it expects to begin production from its
62,500 bpd Firebag 4 thermal oil sands project by year end.
Though much of its output is upgraded into light synthetic
crude, the company expects to sell as much as 90,000 bpd of
bitumen in 2013, up from as much as 50,000 bpd for 2012. 
    Additional heavy crude will also come from Cenovus Energy
Inc's oil sands projects. It said this week that an
expansion of the Christina Lake thermal oil sands project it
co-owns with ConocoPhillips will add 40,000 barrels per
day of new production, pushing the capacity of the project to
98,000 bpd by the second quarter of 2013. 
    Along with those projects, expansions and new facilities
operated by Canadian Natural Resources Ltd MEG Energy
Corp and others could push output from thermal oil
sands projects alone from just about 1 million bpd currently to
1.18 million bpd by the end of 2013, according to data from the
Oil Sand Developers Group, an industry association. 
    Production growth comes without any increase in pipeline
capacity to take additional oil to market. Enbridge Inc
, whose lines carry the bulk of Canada's crude exports
to the United States, plans a C$6.2 billion ($6.30 billion)
expansion of its system to add 400,000 bpd of new capacity, but
the first of a series of expansions will not be finished until
mid-2014.  
 
    In addition, TransCanada Corp's 830,000 bpd
Keystone XL pipeline still awaits approval from the Obama
administration. Should that come early next year as expected,
the line would not be in service until late 2014 at the
earliest. 
    Some price relief may come when BP Plc completes the
conversion of its 405,000 bpd Whiting, Indiana, refinery to
raise the amount of Canadian heavy oil to 80 percent of its
capacity from 20 percent. However the company does not expect
work to be complete until mid-2013. 
    While the price difference between Western Canada Select and
West Texas Intermediate crude usually widens in the winter -- it
dipped to $37.50 per barrel last February and stayed below $30
until mid-March -- 
    "I suspect there will be a seasonal impact again in 2013,"
said Michael Dunn, an analyst with FirstEnergy Capital. "BP
Whiting will help but in terms of the (pipeline) bottlenecks
it's still 2104 before you see any real relief."