Bitumen offers excellent earnings

In an energy-hungry world, all oil isn't priced the same.

And that difference is costing both producers and the Alberta treasury hundreds of millions of dollars a year.

Producers and European consumers use the price of North Sea oil called Brent as a market guide. In North America, West Texas Intermediate (WTI) stored in the vast tank farms of Cushing, Okla., is what commodities traders deal with, and other varieties are priced at a discount or premium to the WTI benchmark.

Bitumen upgraded into synthetic crude is much valued by the markets. Priced at Edmonton's storage tanks, the "synthetic blend" produced by Syncrude, Suncor, Canadian Natural and Shell is often priced higher than WTI. In April, for example, WTI sold for $112.86 a barrel while synthetic went for $124.54.

On the other side of the equation, Western Canadian Select (a mix of heavy conventional and bitumen crude oils blended with sweet synthetic and condensate diluents) will be priced below WTI. In April, this benchmark stored at the tank farms of Hardisty was selling for $90.09 a barrel.

But the real loss for both producers (at least those without upgraders) and the province is with raw bitumen, which was priced at $69.57 at Hardisty in April.

Alberta calculates its oilsands royalties on raw bitumen. The price difference between the bitumen and Western Canadian Select and WTI is the differential.

When upgraders in Alberta and the U.S. are humming, the price of bitumen rises, narrowing this differential.

But this year a glut has developed in the wake of upgraders taken out of production for maintenance in the U.S. and Canada, the Horizon upgrader fire early this year, pipeline ruptures last fall in the U.S., and steadily increasing bitumen production in Alberta.

The glut will get worse unless major pipeline projects -such as the Keystone XL to Houston, the Northern Gateway to Kitimat, B.C., and an expanded TransMountain to Vancouver -are built.

Until a few years ago, the price differential really wasn't an issue, since Alberta upgraders were handling most of the bitumen.

But as heavy-oil imports from Mexico and Venezuela to the U.S. Gulf Coast declined, and refineries in the U.S. Midwest retooled to handle heavier Alberta crudes, a bitumen market developed.

And as demand increased in the U.S., the bitumen became more valuable. The differentials, or price spreads, were often under $10 a barrel.

But while the new reality of wide spreads is bad news for provincial royalties, it is great news for the integrated energy firms that upgrade bitumen.

This huge differential gap was the reason firms such as Syncrude, Suncor, Shell and CNRL recently reported excellent earnings for the bitumen to upgrading part of their business.

Suncor's chief operating officer Steve Williams said last month in a conference call that having the company's mines, upgrader and Edmonton refinery "so close together, and having the ability to move materials between them, is proving very beneficial to us. Because of the integration between oilsands and downstream, we have been able to take advantage of (the differentials)."

dcooper@edmontonjournal.com