UPDATE 2-Canadian Oil Sands sees oil discounts lingering

Fri Nov 30, 2012 1:16pm EST

* 2013 spending pegged at C$1.3 billion

* Bakken output growth fueling synthetic discounts

* Production to increase 4 percent to 301,000 bpd

By Jeffrey Jones

CALGARY, Alberta, Nov 30 (Reuters) - Canadian Oil Sands Ltd , which has the largest stake in the Syncrude Canada Ltd oil sands project in northern Alberta, expects booming U.S. light crude production to keep on pressuring prices for the synthetic oil that Syncrude pumps out in large volumes, its chief executive said on Friday.

Canadian Oil Sands, which announced a C$1.3 billion ($1.3 billion) 2013 capital spending budget late Thursday, expects its product to fetch $5 a barrel less on average than the U.S. oil benchmark, West Texas Intermediate, next year.

The differential varies widely. In 2011, synthetic fetched a premium to WTI of $8.27 a barrel on average, and in 2012, it has sold for an average discount of $1.38 a barrel, according to Shorcan Energy Brokers.

Syncrude, a joint venture of international oil companies, produces light crude processed from the oil sands, which has similar characteristics to the oil produced in fast-growing volumes in the Bakken region of North Dakota using horizontal drilling and hydraulic fracturing techniques.

The International Energy Agency last week singled out the Bakken as one of the main drivers of its forecast for the United States to overtake Saudi Arabia and Russia as the world's top oil producer by 2017.

"Refineries are looking to accept this oil. It's easier to process. I think that's clear," CEO Marcel Coutu told analysts. "So I think that we will continue to have a discount for light product, which ours is one of, and we will find refineries that will take our product."

The crudes compete for pipeline capacity to U.S. Midwest refineries and surging output has spawned a major expansion of rail capacity as new pipelines to move the surging volumes are slow to get built.

In early November, Suncor Energy Inc said rising light oil production threatened the profitability of a planned 200,000 barrel a day oil sands upgrading facility called Voyageur.

Suncor is also a partner in Syncrude, which has a capacity of 350,000 barrels a day. Last year, the Syncrude partners pushed back some of their large expansion plans, partly to iron out reliability issues that had led to unplanned outages.

Canadian Oil Sands has a 37 percent stake in the project, located north of Fort McMurray, Alberta.

About 63 percent, or C$836 million, of its 2013 budget will be invested in projects to replace or relocate mining infrastructure and to develop facilities to reclaim tailings, a by-product of the mining process. The rest will be spent on regular maintenance, the company said in a statement.

It will spend C$393 million on maintenance, including a planned outage of one of its upgrading units in the second half of 2013.

Canadian Oil Sands said it expects Syncrude to produce 105 million to 115 million barrels in 2013, or about 301,000 barrels a day at the midpoint. That represents an increase of about 3 percent from estimated 2012 volumes.

Costs per barrel are expected to be C$36.67, about 3 percent lower than this year.

The company intends to maintain its quarterly dividend of 35 Canadian cents a share through 2013, the CEO said.

Cash flow, which gives a glimpse into the company's ability to fund development and pay out dividends, is estimated at C$1.04 billion, or C$2.16 a share, for 2013, the company said.

"Given COS's strong balance sheet, we believe the company is capable of managing the dividend while funding its major project spending over the next couple of years," National Bank Financial analyst Kyle Preston said in research note. "Following the completion of these projects, we expect the company will have a much more balanced payout profile going forward."

Shares of Canadian Oil Sands, which has a market value of C$9.91 billion, were off 13 Canadian cents at C$20.30 on the Toronto Stock Exchange on Friday. They have fallen 15 percent so far this year.

Syncrude's other partners are Imperial Oil Ltd, Nexen Inc, Sinopec, JX Holdings Inc's Mocal Energy and Murphy Oil Corp.

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