Oil Sands Crude Prices Falling Off the Table (TRP, PSX)

Just as WTI crude trades at a discount to Brent crude, so too does crude for Canada’s oil sands (called Western Canada Select) trade at discount to WTI. The WTI-Brent spread is about $22 a barrel today, with WTI trading around $86 a barrel and Brent at around $108 a barrel.

Western Canada Select (WCS) has been selling for around $48 a barrel less than Brent, or about $60 a barrel. This is good news for refiners that have access to WCS and not such good news for oil sands producers. The existing Keystone Pipeline owned and operated by TransCanada Corp. (NYSE: TRP) from Alberta now delivers synthetic crude to the Phillips 66 (NYSE: PSX) and some on to the main U.S. pricing point at Cushing, Oklahoma.

The problem for producers is the cost of extracting and upgrading the tarry oil sands. Existing oil sands projects can make a profit even if WCS drops below $50 a barrel, but new steam-assisted projects need a price of $65 to $70 a barrel just to break even and mining projects need a price of more than $90 a barrel to break even. If the low prices continue, new projects will be delayed until demand forces the prices back up.

Crude oil from the Bakken Shale play in North Dakota and Montana has risen to a premium of around $4 a barrel to WTI, although it traded at a discount of about $10 a barrel for nearly a year. The narrowing of the spread is due to increased rail transport out of the Bakken play.

TransCanada’s proposed Keystone XL Pipeline will make it easier to get WCS crude out of Canada and is expected to close the spread between WCS and Brent. Canadian producers are hoping that the spread will narrow toward the Brent price, while consumers should be hoping that Brent prices will come closer to WCS prices. Which way the spread closes remains to be seen.

Paul Ausick