BP’s oil refinery in Whiting, Ind., on the shores of Lake Michigan, will soon start a new unit that can process about 100,000 barrels of crude a day.JOHN GRESS/Reuters
There's nothing quite like a jolt of new demand to light a fire under regional oil prices, and that may be on tap for Canadian heavy crude.
It would bring welcome relief to oil-weighted producers now dealing with heavy oil discounts of more than $34 (U.S.) a barrel below U.S. benchmark West Texas Intermediate. The winter dropoff in demand for asphalt and the old bugbear of tight pipeline export capacity have combined to pressure the Canadian heavies in similar fashion to last year, when the "bitumen bubble" entered the public discourse.
However, BP PLC appears to be starting up a major new processing unit at its massive Whiting, Ind., refinery that is aimed at boosting use of Canadian heavy crude, according to a report. The addition of the the coking unit at the plant is one catalyst Canaccord Genuity analyst Phil Skolnick has been waiting for to help support heavy oil prices, even in the absence of a U.S. approval for the Keystone XL pipeline.
Mr. Skolnick has "buy" ratings for two main "focus list picks" on which such developments will have a big positive impact – Canadian Natural Resources Ltd. (CNRL) and MEG Energy Corp. Both have lost some ground as oil prices have weakened in the past few weeks. CNRL has the highest proportion of heavy crude production among senior producers at 40 per cent, and no refining assets. MEG, as an oil sands producer, pumps out nothing but bitumen.
Quoting the energy intelligence service Genscape and refinery sources, Reuters reported that BP had started up the coker – a unit that helps turn the heavy crude into refinery-ready lighter oil – at the 405,000-barrel-a-day Whiting plant. That new unit has a capacity of 102,000 barrels a day. Its addition is part of a $4-billion (U.S.) upgrade at the refinery.
It could take six months for the unit to run at capacity volume, Mr. Skolnick said in a note to clients.
Other positives on the horizon for the heavy-oil market include the impending startup of TransCanada Corp.'s Gulf Coast project, which is the southern leg of Keystone XL between Oklahoma and Texas refineries; Enbridge Inc.'s Flanagan South pipeline in the U.S. Midwest next year; and increasing crude-by-rail capacity, he said.
Western Canada Select heavy crude sold for $34.50 a barrel under WTI on Thursday, according to oil broker Net Energy Inc. That compares with a discount of more than $40 a barrel last week.
Canaccord Genuity said other companies that stand to benefit most from improved heavy crude fundamentals include Baytex Energy Corp., Crew Energy Inc., Devon Energy Corp, Twinn Butte Energy Ltd. and BlackPearl Resources Inc.
Jeffrey Jones