OPEC Cuts Pad Wallets of North American Heavy Oil Producers

EghtesadOnline: OPEC’s supply cuts are providing a windfall for producers of heavy crude from Western Canada and the Gulf of Mexico.

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25 March 2017

Prices for Western Canadian Select and Mars grades have strengthened relative to benchmark West Texas Intermediate since OPEC began implementing its reductions this year. These gains have held even after WTI sank below $50 a barrel earlier this month amid rising U.S. output, according to Bloomberg.

The Organization of Petroleum Exporting Countries and other large producers agreed to reduce output from January to rebalance an oversupplied global market, but individual members were left to decide how to implement their pledges. Saudi Arabia and its neighbors reduced exports of less-expensive heavy, sour crude, leaving refiners to seek similar grades from North America. Heavier oil is more complex to refine, requiring more secondary processing to make high-value transportation fuels.

“We are seeing a real hunger for the heavy oil,” Bill McCaffrey, chief executive officer of MEG Energy Corp., a Canadian oil sands producer, said in a Feb. 9 conference call.

Western Canadian Select was $12.70 a barrel below West Texas Intermediate Wednesday, according to data compiled by Bloomberg, the narrowest discount since June. Mars reached a $1.45 discount this week, the tightest since February 2016.

“The cut will reduce the availability of heavier imports from overseas, creating an opportunity for more domestic barrels to be soaked up,” Mara Roberts, a New York-based analyst at BMI Research, said in a phone interview.

Two shipments of heavy Southern Green Canyon crude from the U.S. Gulf of Mexico set sail for Japan in January and February and India’s Reliance Industries Ltd. purchased a cargo of Western Canadian Select for its Jamnagar refinery set to arrive next month.

Sigh of Relief

Canadian companies such as Cenovus Energy Inc., Canadian Natural Resources Ltd., and MEG and deep-water producers in the Gulf of Mexico including Chevron Corp, Royal Dutch Shell Plc and Anadarko Petroleum Corp. continued to pump through the downturn as shutting sites is both costly and potentially harmful to reservoirs. Because of that, they were among the hardest hit when prices plummeted to less than $27 in January of 2016 from more than $100 a barrel in 2014.

Anadarko and oil-sands producer Devon Energy Corp. are two companies that stand to profit, Paul Grigel, analyst at Macquarie Capital USA Inc in New York, said in a phone interview. “Anadarko has put in some cash flow back into the Gulf of Mexico to maintain production rates.”

Canadian producers should also get a boost as long as crude prices don’t fall too far.

“At $40 to $50 a barrel and with Western Canadian production at 2.5 million barrels a day, that would work out to $25 million a day in increased cash flows,” Michael Wojciechowski, vice president of refining and oil markets research at Wood Mackenzie Ltd., said in an interview in San Antonio, Texas. “Over a year, that would approach nearly $10 billion a year in increased cash flow. That’s quite a difference in cash flow compared with what they had before.”

The brighter outlook for heavy crude has prompted some oil sands producers to resume expansion programs. Canadian Natural, Cenovus and MEG have announced plans to proceed with oil sands expansion projects that will add 110,000 barrels a day by the end of the decade.

“We’ve actually already seen some projects in Canada being taken off the shelf and back into play,” Mark Broadbent, a senior research analyst at Wood Mackenzie said by email.