Longer term constraints risk stranding over a million barrels a day of
potential oil growth
CALGARY, Dec. 17, 2012 /CNW/ - While pipeline expansion in 2013 will add
nearly a million barrels a day of capacity, it won't be enough to
eliminate the discount Canadian producers are getting for their oil,
finds a new report from CIBC World Markets.
The report notes that while the consensus view is the new Seaway
expansion (250,000 barrels a day in Q1/2013) and the south portion of
Keystone XL (700,000 barrels a day in late 2013) will solve the pricing
gap faced by Canadian producers, detailed analysis shows otherwise.
"In our view, they will help narrow the Brent-West Texas Intermediate
discount but that discount will remain in the US$10 a barrel range,"
says CIBC oil and gas equity analyst, Andrew Potter. "Our rationale is
that these new pipes simply push the current (Midwest) PADD 2 glut into
(Gulf Coast) PADD 3, which will knock out PADD 3 light oil imports in
early 2013 and prompt Light Louisiana Sweet (LLS) pricing on the Gulf
Coast to begin discounting vs. Brent.
"We believe LLS will move to an approximately US$5 a barrel discount vs.
Brent. And WTI will move to a transportation discount vs. LLS of
approximately US$5 a barrel, leading to a long-term Brent-WTI
differential of US$10 a barrel. We believe consensus expectations
overstate the value of domestic oil producer exposed to this theme and
understate valuations of Brent-exposed and downstream-exposed
Mr. Potter says the bank's modeling shows North American oil production
can grow by approximately 800,000 barrels a day per year through 2016.
The growth can be distilled down to approximately 500,000 barrels a day
per year from U.S. on-shore oil; ~45,000 barrels a day per year from
U.S. offshore; ~100,000 bbl/d per year from Canadian light oil; and
~230,000 barrels a day per year from the oil sands. Over this same
period this growth is offset by ~100,000 barrels a day per year decline
in Mexican production.
For Canadian producers, pipeline constraints have the potential to
strand this increase in production growth.
"Pipeline capacity out of Western Canada is adequate for the short term,
but substantial progress must be made on this front in 2013," says Mr.
Potter. "Progress, or lack thereof, will have a big impact on sentiment
towards Canadian oil producers. We estimate that pipeline capacity out
of the Western Canadian Sedimentary Basin could effectively be full in
the 2014 time frame, suggesting little room for error/politicking in
bringing on new pipeline capacity."
He notes that there are ~2.9 million barrels a day of long-haul pipeline
proposals on the table out of Western Canada. "That sounds like a lot
until one considers that two of the largest - the proposed 525,000
barrels a day Gateway and 450,000 barrels a day TMX expansion through
B.C. - face ever increasing political risk. We assign no better than
50/50 odds that these pipes are built before the end of the decade."
He adds that the proposed TransCanada Mainline conversion (estimated
~600,000 barrels a day) is compelling but very early stage and could
also provoke some political backlash in Québec. "The 2.9 million
barrels a day proposed capacity is quickly depleted given our forecast
of 100,000 barrels a day per year growth in Canadian conventional oil
and 230,000 barrels a day per year growth in oil sands. Canada needs
pipe - and lots of it - to avoid the opportunity cost of stranding over
a million barrels a day of potential crude oil growth."
Upside for Refiners
However, Mr. Potter sees growth opportunities for Canadian and certain
U.S. based refiners. The pipeline constraints have allowed certain
refiners to reap super-normal cash flows in 2011 and 2012. While most
investors believe this phenomenon to be very short term and have
assigned very low valuations to refiners or integrateds that are
gaining from this theme, he believes there will be a recognition in
2013 that price differentials are here to stay, and that will keep
downstream margins elevated in the long term.
"As investors recognize the strategic value of downstream, we expect to
see a gradual re-rating of downstream-oriented names - in Canada that
is Suncor Energy Inc. (SU-SO), Cenovus Energy Inc. (CVE-SO), Husky
Energy Inc. (HSE-SP) and Imperial Oil Limited (IMO-SP)]. If producers
are losing out given price differentials, it means that refiners are
benefiting and refinery economics are massively sensitive to every
dollar change in crack spreads."
The complete CIBC World Markets report is available here: http://files.newswire.ca/256/Oil_-_Uncertainty_Reigns_Again.pdf
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PDF available at: http://stream1.newswire.ca/media/2012/12/17/20121217_C9496_DOC_EN_22002.pdf
For further information:
Tom Wallis, Communications and Public Affairs at 416-980-4048, email@example.com