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Report predicts end of big price differentials for Canada’s heavy oil

Mining trucks carry loads of oil-laden sand at the Albian Sands oils sands project in Fort McMurray, Alta.


A repeat of lasting, wide spreads between Canadian oil prices and other global benchmarks as seen last winter is unlikely to happen again, according to an energy outlook report from FirstEnergy Capital Corp.

The wild swings in the differential – or the discounted price that Western Canada's heavy oil is sold at compared to other U.S. and global benchmarks – will be tempered by a greater number of transportation options, including new pipeline and rail projects, said FirstEnergy vice-president Martin King.

Canadian heavy oil is sold at a discount to other North American and world crudes both because of the additional processing requirements for bitumen, and because of the congestion in the routes used to get oil to markets. The volatile spread reached more than $40 (U.S.) a barrel of oil last winter.

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On Tuesday, Western Canadian Select – an oil sands production price benchmark – was trading for a not insignificant $32 (U.S.) less than West Texas intermediate for November deliveries, according to Calgary-based oil broker Net Energy Inc.

But Mr. King said this is a short-term fall in Canadian prices, and this time around, the price corrections will come more quickly. "It's not going to go roaring back to $10 or anything like that. But it's going to come off these mid-$30 lows you've seen in the last week or so."

Mr. King added that the more stable price environment isn't based on the controversial Keystone XL pipeline being approved by the U.S. State Department.

"This is a pipe that has been talked to death. Will it be approved? I have no idea. But I think the market is already starting to look beyond that," he said.

In presenting his energy outlook in Calgary on Tuesday, Mr. King said there are good reasons to believe the current widening trend in the differential is more temporary than it was one year ago. He said the options for moving crude are getting better, including increased rail transport.

Already, moving crude through the U.S. Midwest is improved compared with a year earlier, and new projects continue to be proposed and completed. For example, BP PLC's Whiting refinery outside of Chicago will switch to a "diet of all Canadian heavy [oil] by November/December," he said.

The Canadian government and business leaders argue an inordinately wide differential is costing Canadian oil producers tens of millions of dollars a day, and a push to build new pipelines both to the U.S. and across Canada to coastal ports must continue. However, the construction of new pipelines has been fraught with environmental objections.

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Although Canada's oil industry is increasingly relying on train transport, the deadly derailment and explosion in Lac-Mégantic, Que., in July has raised concerns about the increased use of rail tank cars to transport petroleum products and other dangerous substances.

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