Wider spreads predicted for heavy oil

The party could be coming to an end for Canadian heavy oil producers accustomed to an extended period of relatively high pricing versus lighter American crudes, industry observers said Friday.

That's because the spreads between light and heavy oil have started to widen after almost 18 months of near-parity, resulting in lower prices for Alberta heavy oil producers.

A report by Calgary-based FirstEnergy Capital Corp. said the difference between a barrel of Western Canadian Select heavy crude at Hardisty and West Texas Intermediate at Oklahoma stood at $20 US this week, compared with less than $10 at the start of the year.

Although the spreads tend to blow out at the conclusion of the summer paving season when demand for asphalt falls, it's still the highest level since the third quarter of 2008, FirstEnergy said. Contributing to the gap is the Enbridge pipeline rupture in Michigan that has reduced flows of Canadian crude to Midwest U.S. refiners, combined with higher production volumes of both light and heavy crude here at home.

"Pipeline disruptions and changing oilsands supply dynamics have resulted in wider heavy oil differentials in recent weeks, and we suspect these wider differentials could remain in the near term," the report said.

According to Imperial Oil's website, the difference between the posted price of a barrel of Edmonton Par and Bow River heavy widened to $10.97 Cdn, or 15 per cent, on Aug. 18, compared with $6.20 or nine per cent on Aug. 3.

Dana Laustsen, a principal with GLJ Petroleum Consultants, said his firm expected heavy oil spreads to move back to typical norms that existed prior to 2008, and will re-examine heavy oil pricing in the fall.

"We never expected them (differentials) to be so narrow for so long," he said. "We did expect them to widen."

While heavy oil prices remain relatively strong by historical standards, Ralph Glass, AJM Petroleum Consultants' vice-president of operations, said longer-term trends could see Canadian producers taking a hit depending on the pace of the economic recovery in the U.S.

In the case of a slow recovery, Canada could be looking at a glut of oil, since virtually all Canadian oil exports head south. Glass said the big winners are the U.S. refiners that find themselves with more options to run profitable light oil from plays such as the Bakken in North Dakota.

"Right now we're in kind of a holding pattern," he said. "I don't think we're at that point yet, but I think we're going to see in Canada the potential for an oversupply situation. I don't think we're going to see the narrow spreads we've seen over the last 16 to 17 months."

Wider spreads tend to favour companies like Suncor and Syncrude that upgrade their production into synthetic oil, but Glass said they're still not wide enough to kick-start upgrading projects that were shelved in the downturn.

Instead, he thinks pipeline companies like Enbridge and Kinder Morgan will be encouraged to move ahead with the proposed Northern Gateway and TransMountain expansion to the West Coast, to diversify markets. But any new outlet to Asia is probably five years way, he noted.

"If we start getting backed up we're going to start to see lower prices," he said.

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