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Asphalt: The new darling of the oil industry Add to ...

For many years, asphalt has been the bottom of the barrel, one of the worst products to come dripping out of a refinery.

It is dark, thick and smelly, the "poor boy of the refining business," as Richard Gusella, the chief executive officer of Connacher Oil and Gas Ltd. , calls it.

But for some refiners, struggling against the tide of red ink that has inundated their industry, asphalt is poor no longer. A runup in asphalt prices earlier this year, driven partly by stimulus spending and the road building it supports, created surprisingly thick margins for a commodity that has in the past been sold at a loss.

It is, some believe, a glimpse of what could become a more important source of earnings for some refiners as supply for the product begins to diminish.

"We're probably making more money today out of asphalt than we are from the other products," Mr. Gusella said in an interview.

The Calgary-based company has locked in more than half its asphalt production - which forms 30 per cent of the output from its 10,000-barrel-a-day refinery in Great Falls, Mont. - at prices higher than $100 (U.S.) a barrel. Connacher won't disclose its profit margin, but those sale prices come at a time when it is paying between $60 and $70 per barrel of crude.

Connacher also makes gasoline, diesel and jet fuel at its refinery, which runs entirely on Alberta heavy crude and sells its output across Montana, Washington state and Canada.

The company is not alone in seeing stronger asphalt prices. Husky Energy Inc. is Western Canada's largest supplier, producing just over 25,000 barrels a day from its Lloydminster asphalt refinery.

"If you compare this time last year to this year, you can see a strengthening," said spokesman Adam Sparkes. Husky reports its second-quarter results on July 28, and declined to provide more detail ahead of that time.

Other major western asphalt makers include Imperial Oil Ltd., Chevron Corp. and Gibson Energy.

But it is Calgary-based Husky, with a 39-per-cent market share in the West, that stands to gain the most from better asphalt margins: Last year, asphalt was its top refining product by gross margin at $166-million - well above the $111-million from fuel products.

Yet as oil companies prepare to report their second-quarter financial results, it remains unclear how greatly asphalt prices will affect performance, since it depends in part on what percentage of output was contracted this spring, when prices were high. Demand worries and expectations of a strong paving year lifted prices from $540 (Canadian) a tonne to $615 several months ago. (There are roughly 6.3 barrels in a tonne of asphalt.)

Those prices have now fallen to $575 a tonne, as continued economic weakness has meant that some of the expected construction has not materialized. Low rates of new home construction have also hurt asphalt, because roofers are a major buyer of the product.

But construction companies often lock in prices for big jobs to obtain cost certainty, and contracts struck at the height of the market have helped propel asphalt earnings through the summer.

Larger forces could, however, make asphalt an increasingly profitable product in future years.

Asphalt is produced from the heaviest parts of heavy crude, and heavy crude production in North America is growing, thanks to the Alberta oil sands. That should mean more asphalt - but instead, the opposite has happened. Eager to capitalize on the heavy crude growth, refiners across the continent have scrambled to build what's called "coking" capacity.

Cokers take those heaviest parts of the barrel and, in simple terms, refine them into more marketable products. That leaves less of the heavy product to make asphalt - and cokers are growing rapidly. Between 2008 and 2013 alone, North America will add more than 18 per cent to its total coking capacity, according to research firm GlobalData.

The new capacity has already had an impact on asphalt, which has historically moved up and down in tandem with oil prices. While that still happens to some extent today, it has become more decoupled from crude - and road builders and asphalt suppliers worry that the future will see higher prices for asphalt.

"The decrease in supply has increased the prices at times," said Ward Sparrow, the general manager at Vancouver's Lafarge/McTar Petroleum, a paving contractor.

"The fundamentals for asphalt are changing all the time. Less sources are becoming available to us."

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