January 15, 2013 / 6:25 PM / 7 years ago

Canada heavy oil price nears tipping point -analyst

* Deep discounts seen persisting for months

* $45-$50 break-even seen for conventional heavy oil

* SAGD oil sands can produce at sub-$30 a barrel

By Jeffrey Jones

CALGARY, Alberta, Jan 15 (Reuters) - Canadian heavy oil prices, pressured by a combination of tight pipeline capacity and delays in a U.S. refinery retooling, have fallen close to the trigger point for companies to begin shutting off some production, an analyst said on Tuesday.

Prices for Western Canada Select (WCS) heavy blend, a widely quoted grade, have fallen recently to around $50 a barrel, less than half the price of a barrel of international benchmark Brent, pressuring the bottom lines of producers.

With little in the way of new pipeline capacity expected in the coming months, the deep discount is expected to persist, said FirstEnergy Capital Corp analyst Martin King.

The first production that is likely to get shut down will be traditional heavy oil, in which low-volume wells pump crude without the aid of steam or other enhanced recovery, King said.

“You’ve got to think that the more conventional heavy is probably borderline right now,” he told Reuters after speaking to an industry audience in Calgary.

He said such supplies are likely to require a price of $45-$50 a barrel to generate positive cash flow.

Higher-volume projects with enhanced recovery techniques and oil sands projects that use steam-assisted gravity drainage for extraction can probably keep producing at some price point below $30 a barrel, he said.

“And that would have to be sustained a good many months before they even consider dialing it back,” he said.

Besides producing more efficiently, such developments are more difficult to shut down, due to the need to keep steaming the reservoirs to allow the crude to flow to the surface.

WCS heavy crude for February delivery was last quoted at $38.25 a barrel under U.S. benchmark West Texas Intermediate, putting the absolute price at about $55.50 a barrel, according to Shorcan Energy Brokers.

The price has weakened this month as pipeline space has tightened, especially after Enbridge Inc imposed mid-month apportionment on its Canada-United States system due to technical glitches. This comes as Imperial Oil Ltd nears start-up of its 110,000 barrel a day Kearl oil sands project in northern Alberta.

Indeed, Enbridge has begun to police its shippers more closely to make sure they deliver and receive supplies on time to ensure that the network runs as efficiently as possible.

FirstEnergy’s King also cited reports last month that said BP Plc had hit snags in the revamp of its 337,000 barrel a day Whiting, Indiana, refinery, a much-anticipated project that includes adding a 120,000 bpd coker unit that will boost demand for Canadian heavy oil.

Such problems could push the refinery’s start-up back to mid-year or beyond from the previous target of March, he said.

Large, longer-term pipeline expansions by Enbridge, TransCanada Corp and others are not expected to begin until at least the second half of this year.

“The industry’s got to start wrapping its head around looking at wider differential for longer - certainly for at least the first half of this year,” King said.

For WCS pricing, he currently projects an average $20 per barrel discount to WTI for 2013, but cautioned that may deepen by $5 to $7.

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