OTTAWA (Dow Jones), Mar. 23, 2010
Canadian producers of crude from oil sands are making a big push into the U.S. Gulf Coast market, where refiners are paying the highest prices in decades for low quality, high-sulfur oil.
Historically, Canadian high-sulfur, or "heavy," crude, shipped by long-distance pipeline, has struggled to compete against cheaper, seaborne shipments of oil from Mexico, Saudi Arabia and Venezuela. But Mexico's heavy-crude output is declining and Venezuelan exports of the stuff to the U.S. have dropped amid a rocky political relationship between the two nations. Saudi Arabia, meanwhile, has also cut exports of high-sulfur crude, which is less profitable than lighter varieties, as part of broader cuts by the Organization of Petroleum Exporting Countries.
Reduced competition and higher prices for Canadian crude come at a good time for Alberta's oil-sands industry, which is expected to double within the next 10 years to 3.1 million barrels a day and requires new markets to soak up the growing output. While Canada
"We think there's an opportunity for Canadian companies to gain more market share in the Gulf market," said Alberta Energy Department Assistant Deputy Minister Mike Ekelund, who is in charge of the province's resource strategy. "We're a supplier that's right next door, we're relatively politically stable, and we think there's a great deal of benefit for Americans in terms of having a secure access
Mexico's heavy crude oil is in decline due to waning production from its giant Cantarell offshore field in the Gulf of Mexico, and U.S. exports declined to 1.24 million barrels per day last year, down 28% from their peak in 2006.
In Venezuela, production has been in decline due to political instability and lack of new investment. President Hugo Chavez has also
Meanwhile, other OPEC exporters, mandated to cut production to keep prices high amid lower world demand, have cut production of
As the Gulf Coast's regular supplies of heavy crude oil have declined, the price for it has shot up, as Gulf refiners -- heavily invested in
Canadian Natural Resources Inc. (CNQ), a large Canadian oil and gas company with significant production of heavy crude from the oil sands region, said the Canadian heavy oil discount to West Texas Intermediate crude dropped to an average of 16% during the fourth
"Historically the heavy oil differentials have been in that 30% to 45% range, averaging about 32%," Canadian Natural President Steve Laut said during the company's fourth-quarter conference call earlier this month. "We think that has structurally changed and right now, as you know, Canadian heavy crude differentials are probably in that 10% range, very low."
Laut said high heavy crude prices were likely to drop a bit, but Canadian heavy crude would likely trade at a discount of 22% to 24% for the foreseeable future.
As a result, Wall Street analysts have begun rewarding Canadian companies that are slanted toward heavy-crude production. Analysts at Goldman Sachs, Morgan Stanley, Credit Suisse, Raymond James, Scotia Capital, BMO Capital Markets, and Canaccord Adams have all upgraded Canadian Natural to buy-equivalent ratings this year.
Canada's government is aiming to help heavy-oil producers expand in the U.S. Gulf market, too. Earlier this month, Canada's national
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