Crude has begun flowing again from a major fire-stricken oil sands mine, but for a small group of energy companies, the pricing bonanza that followed the blaze is likely to stick around for a few more months.
After months of repair and delay that followed a January fire at its Horizon operation, Canadian Natural Resources Ltd. (CNRL)Canadian Natural Resources Ltd. said Tuesday that it is now producing 75,000 barrels a day of synthetic crude oil. Over the next week, that figure is expected to climb to 110,000 barrels.
But analysts say an oil price spike caused by the Horizon outage is likely to last through October, as another oil sands operator, Syncrude Canada Ltd., halts an equivalent volume of production for an expected six weeks.
The reason lies with the unique properties of so-called “synthetic” oil, which is created by companies who take the thick, heavy bitumen from the oil sands and send it through a high-temperature upgrading process that transforms it into a lighter oil that can then be further refined into products like gasoline and jet fuel. Synthetic oil is also coveted by other oil sands companies that don’t operate upgraders but use synthetic as a thinner that allows their bitumen to flow through pipelines to market.
The Horizon outage took enough synthetic supply out of the market that prices shot up, and for most of this year the product has fetched substantial premiums over other North American crude oils. When oil hit $100 (U.S.) a barrel, synthetic rose above $110.
That has been a huge boon to companies that produce synthetic crude, including Canadian Oil Sands Ltd., which owns a one-third stake in Syncrude, Suncor Energy Inc., Husky Energy Inc. and Nexen Inc. Last year, Alberta companies produced an average of 879,000 barrels a day of synthetic crude – and with eight months of a price premium of about $10, the extra profits have been hefty.
But for at least some of those companies, the good times are likely to stick around, as Syncrude conducts a 45-day maintenance operation at its oil sands plant. That’s expected to drop 100,000 barrels of synthetic output from the market.
“It’s almost a full offset to the Horizon production coming back,” said Phil Skolnick, an analyst with Canaccord Genuity. With Horizon back, “the synthetic premium hasn’t come down yet, and it may not.”
Indeed, on Tuesday, synthetic crude continued to sell at roughly 15 per cent above other crudes.
That’s a boon to CNRL, too, for which the resumption of Horizon means turning back on a major revenue source.
“If there’s no synthetic premium, and an equal Canadian-U.S. dollar, you get almost $2-billion of cash flow a year from Horizon itself,” Mr. Skolnick said.
And, he said, markets are likely to give the company credit for getting oil flowing again, despite months of repair delays caused by extreme cold and forest fires. CNRL shares rose 6 per cent to $34.88 Tuesday, ahead of the 4 per cent gains on the TSX capped energy index.
“Nobody was really expecting a press release this soon, and especially one to say they’re producing as much as they’re producing already,” Mr. Skolnick said. “That may cause those who were skeptical or bearish to maybe rethink a little bit.”