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Alberta's heavy crude oil nearing $40 a barrel, threatening new projects

Tags: Alberta, Oil

Canadian heavy crude fell to near $40 a barrel, threatening projects under construction as producers boosted output and space on a pipeline was rationed.

Imperial Oil Ltd. is increasing output at its Kearl oil sands project to 110,000 barrels a day after a shutdown last month, Pius Rolheiser, a Calgary-based spokesman said by phone yesterday. Enbridge Inc. apportioned space on the Spearhead pipeline, which carries Canadian crude south to Cushing, Oklahoma, after demand to ship on the line exceeded capacity, according to a company statement.

Heavy West Canadian Select dropped $3.73, or 8.1 percent, to $42.19 a barrel yesterday, the lowest since April 2009, data compiled by Bloomberg showed. Crude has fallen into a bear market as U.S. output surges to the highest in more than three decades. Companies including Calgary-based Canadian Natural Resources Inc. have said they may scale back investment plans if oil prices remain near current levels.

“Any production that’s currently under construction is at risk, absolutely,” Dinara Millington, the vice president of research at Canadian Energy Research Institute in Calgary, said by phone. “Any production that’s currently existing can produce at $40 to $50.”

West Texas Intermediate futures added 20 cents to $61.14 a barrel at 4:04 p.m. Singapore time in electronic trading on the New York Mercantile Exchange. Yesterday the contract closed at the lowest level since July 2009.

EXPENSIVE CRUDE

WCS trades at a discount to WTI due to higher production costs and a shortage of pipelines to move supplies to refineries. Some of the oil from Alberta’s oil sands must be dug out of the ground and upgraded into a lighter synthetic crude before it can be processed by refineries, increasing costs.

The lowest-cost oil sands producers use steam to loosen and pull bitumen from the ground and extract the fuel for about $51 a barrel, a July report by the Canadian Energy Research Institute showed.

Last week, Baker Hughes Inc. reported Canadian drillers cut the number of rigs used to the least for this time of year since 2009 as margins were cut by the price fall.

The last time WCS traded below $50 a barrel was in December 2012.

“We saw prices a couple of years ago that were similar to this,” Jackie Forrest, a vice president at ARC Financial Corp. in Calgary, said by phone. “For existing operations, you need to cover your operating costs. We’re still above those thresholds.”

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