March 12, 2012 / 7:10 PM / 8 years ago

No quick end seen to deep Canadian oil discounts

By Jeffrey Jones	
    CALGARY, Alberta, March 12 (Reuters) -
 Bargain-basement discounts on Canadian crude are more than
just a short-term irritant for producers as surging supplies and
a limited U.S. Midwest refining market threaten to cut
industry-wide revenues by as much C$18 billion ($18 billion) a
year, an analyst said on Monday.	
    Wide light and heavy crude price spreads plaguing the
Canadian market since the start of the year could expand even
more in the coming two months as numerous refineries begin
maintenance, and the end of that work and start of a reversed
pipeline to Texas from Oklahoma won't bring permanent relief to
fundamental problems, Andrew Potter, analyst at CIBC World
Markets, said.	
    "Discounts are severe," Potter told investors in a
conference call. "If you don't think this is a big issue, think
    He said the situation could last beyond 2013, when the
Keystone XL southern portion starts to drain large volumes of
supply from the Cushing, Oklahoma, storage hub and moves it to
Texas refineries.	
    The northern, cross-border portion of Keystone XL and or new
pipeline capacity to Canada's West Coast are not expected to
start up until the second half of the decade.	
    Another factor that may ease the situation could be a
reversal of Royal Dutch Shell's 1.2 million barrel a
day Capline pipeline to Illinois from the Gulf Coast, Potter
said. One source told Reuters on Monday that the concept is
under discussion.	
    Canadian synthetic crude, derived from the Alberta oil
sands, and Bakken light oil, from North Dakota shale deposits,
are selling for around $16 a barrel and more under U.S.
Benchmark West Texas Intermediate crude and $34 under the
international Brent marker.	
    That compares with premiums to WTI as late as December, and
comes at a time when supply is constrained by the unplanned
outages at oil sands upgrading plants run by Syncrude Canada Ltd
and Canadian Natural Resources Ltd.	
    Last week, Canadian Natural executives said they are among
those who believe differentials will improve by around mid-year.
Then, maintenance at refineries equaling capacity of 350,000
barrels a day will have wrapped up, and the Seaway Pipeline, run
by Enterprise Products Partners and Enbridge Inc
, begins shipping 150,000 barrels a day to the Gulf
Coast from the over supplied Cushing, Oklahoma, storage hub.	
    Seaway is due to be expanded to 400,000 barrels a day by the
early part of 2013.	
    However, Potter said his view has changed to the more
pessimistic over the past three weeks as he delved into
expectations for supply increases as well as the impact of three
major U.S. Midwest projects to shift to heavy from light oil
    Conversions at the Wood River, Illinois, refinery run by
ConocoPhillips and Cenovus Energy Inc, Marathon
Petroleum's Detroit refinery and BP Plc's 
Whiting, Indiana, plant will add a total of 470,000 barrels a
day of capacity for Canadian heavy crude.	
    However, those projects will also displace 430,000 barrels a
day of light crude in an already glutted market, with Bakken
supplies surging at a rate of as 10,000-20,000 barrels a day
each month. Such gains were not anticipated when the conversions
were first being planned.	
    That is expected to create competition between light and
heavy grades as refiners could choose to run light barrels with
so much available, pointing to deeper discounts for all Canadian
grades, Potter said.	
    Stocks most at risk under the scenario include producers
that do not have refineries and produce much of their oil in
Canada, such as Canadian Natural, Canadian Oil Sands Ltd
, all of whose cash flow is derived from its 37 percent
stake in Syncrude, as well as shale-oil producers Crescent Point
Energy and PetroBakken, he said.	
    Integrated companies, including Suncor Energy Inc 
and Cenovus, would benefit as their refineries have access to
cheap feedstock.	
    Despite the fact that they are forgoing revenue on
exploration and production due to the deep discounts, "they're
absolutely printing money on the downstream side," Potter said.
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