Imperial Oil Ltd.'s massive Kearl oil sands project is being cast as an arbiter of Canadian heavy oil pricing this year, but the oil giant's chief executive says the 110,000 new barrels of oil per day that will come on stream by the third quarter of this year shouldn't surprise anyone.
Imperial chief executive Rich Kruger responded Thursday to comments from Cenovus Energy Inc.'s Brian Ferguson, who said earlier this week he expects the differential – or the discount paid for Canadian heavy oil compared to the North American benchmark price – to widen again in part due to the Kearl mining project unleashing a new torrent of oil when it's fully operational later this year.
However, Mr. Kruger played down any impact Kearl will have on markets.
"The market has been anticipating Kearl," Mr. Kruger said. "We'll see what the market does with it, but it's certainly not a surprise for anyone that it's coming on now."
On Thursday, the volatile gap between Western Canada Select and West Texas Intermediate had reached the more historically normal level of about $17.50 U.S., compared to almost $40 at one point in January. Despite a recent reduction in the discount, producers say limited pipeline capacity and an increasing supply of U.S. light oil – combined with increasing heavy oil production from Canada – means transporting crude to the most lucrative oil markets remains an issue.
Even Imperial reported lower earnings in this first quarter compared to 2012, in part because of discounted prices for its Cold Lake bitumen. Imperial's earnings in the first quarter of 2013 were $798-million, down 21 per cent or $217-million from the first quarter of 2012. The company said the lower earnings "were primarily attributable to the impacts of lower liquids realizations of $270-million, higher refinery and Syncrude maintenance effects of $165-million and higher Kearl production readiness expenditures."
One analyst said the Kearl mining project will be a less important factor in pricing and the differential than the opening of Enbridge's Flanagan South expansion, which is slated to come on stream in 2014. The pipeline link will help to get heavy oil to markets on the U.S. Gulf Coast.
Greg Pardy, a global energy analyst with RBC Dominion Securities Inc. in Toronto, said he has long anticipated an unpredictable, "sloppy" market for Canadian heavy oil in 2013. He noted the oil output from Kearl will be offset in some part by increasing crude demand when BP's Whiting, Ind., refinery comes back on stream in the latter half of this year.
"The key with all of this is that in 2013, Canadian oil differentials are going to be all over the map, for reasons that we will not be able to identify until perhaps after the fact, and then the set of conditions will change again," Mr. Pardy said.
"The key is going to be Flanagan South in mid-2014," he said. "That will give you connectivity between Edmonton and the Gulf Coast."
Mr. Kruger said the Kearl project will begin delivering bitumen by the third quarter of this year, slightly later than most predictions. Although Mr. Kruger said full production at Kearl – the company's largest project ever – is "imminent," the project has been hit by numerous delays, including complication arising from transporting huge building materials across the U.S., and what the company says is especially cold weather. Once tanks and pipelines begin filling with bitumen, it will still take 60-90 days before Kearl's output is delivered to refineries in Canada and the U.S.
Mr. Kruger said Imperial already has plans in place for exporting oil produced from the first phase of Kearl operations, which includes shipments by rail and taking advantage of refinery network linked to Exxon Mobil Corp., which owns 70 per cent of Imperial. While he wants to see U.S. approval of the controversial TransCanada's Keystone XL pipeline – which would transport crude from Alberta and the Bakken to the Gulf Coast – the Kearl project is not dependent on it.
"We certainly think additional pipelines are needed. But we're not waiting on that," Mr. Kruger said. "We're looking at incremental rail options at our facilities, getting our crudes into our own refineries."
The Kearl project itself has a competitive advantage, he said, as costs will come in below conventional oil sands projects. There's no upgrader on site, but a lower-cost paraffinic froth treatment will produce saleable bitumen.