The Bakken has officially claimed its biggest victim, having toppled joint plans by Suncor Energy and France’s Total to build an upgrader to convert Alberta oil sands bitumen into synthetic crude for refining into transportation fuels.
The C$11.6 billion Voyageur project was shelved indefinitely on March 27, ending months of gathering signals from Suncor Chief Executive Officer Steve Williams that the partially completed facility to process 200,000 barrels per day had lost the economic battle with a gusher of light sweet crude across North America, led by the Williston Basin’s Bakken petroleum system.
In addition to more than C$4 billion invested on Voyageur and taking a C$1.5 billion writedown in February, Suncor has paid C$515 million for Total’s 49 percent stake, while Total booked a US$1.65 billion loss on the venture.
Reaching for the positives, Williams said oil sands giant Suncor will “now be able to exclusively utilize its assets to continue driving value from our base business and to support our profitable oil sands growth.”
“It’s very clear the economics on it weren’t going to justify the capital expenditures,” said Robert Mark, a research analyst at the Toronto law firm of MacDougall, MacDougall & MacTier.
Rapid reassessment
Those economics are forcing a rapid reassessment of where the North American oil market is headed, amid a swirl of uncertainty.
In the build up to a final verdict on Voyageur, Williams said the unanticipated volumes of light oil flowing from tight formations in North America have eroded the economic argument for the upgrader.
“If you go out in the five-year-and-beyond timeframe, clearly we have a mixed challenge on the continent,” he said.
“We have too much light, sweet crude, which is what upgraded synthetic crude effectively is, and if anything we have too little heavy crude. Our view is that will cause a squeeze on upgrading margins.”
The Voyageur decision reaffirms what has become increasingly evident over the past two years — the rise in volumes from the Bakken in North Dakota, Montana and Saskatchewan through the application of technology has resulted in a disconnect in crude prices that has put upgraded Canadian heavy crude in a losing position behind tight oil production.
Production the Bakken and its near relatives has undercut the demand for upgraded barrels from Alberta.
Price volatility
A new report by research firm Wood Mackenzie warns that Canadian crude prices could remain volatile for the rest of this decade.
The firm estimates the Bakken will nearly double output to 1.3 million barrels per day in 2015, as strong economics allow the Parshall and Sanish fields — the most productive areas — to break even below US$50 per barrel, a level the oil sands cannot compete with.
New infrastructure projects could potentially alleviate constraints on the pipeline system, securing firmer prices for Canadian and North Dakota crudes, the report said.
However, many of these projects are at an early stage and significant challenges, both operationally and politically, lie ahead, Wood Mackenzie said, indicating that TransCanada’s Keystone XL and Enbridge’s Northern Gateway pipelines could circumvent transportation bottlenecks if they could overcome those obstacles.
“U.S. approval of the Keystone XL northern leg (which could carry 100,000 bpd out of the Bakken) is still pending and a continued delay will result in XL’s southern leg acting as a clearing mechanism for light oil from Cushing until the northern leg is approved and constructed,” said Skip York, a principal analyst in Wood Mackenzie’s oils research team, adding his firm the northern leg will ultimately go ahead, even of the timing slides.
The report said the strong outlook from U.S. tight oil plays warrants diversification for Canadian crudes away from the traditional U.S. Midwest export market, noting that projects are moving forward in varying stages to transport Western Canadian barrels to coastal markets, where stronger Brent-linked prices can be realized.
More oil sands pullback
Having bailed out of Voyageur, Total has indicated its pullback from the oil sands may not be over yet.
The company’s Canadian President Andre Goffart said Total can no longer guarantee its commitment to spend C$20 billion to achieve 200,000 bpd of oil sands production by 2020.
With so many U.S. refineries being reconfigured to process more Canadian heavy crude, there is a surplus of light oil on the North American market and less interest in Canadian synthetic crude, making upgrading less attractive, said Glen Booth, a former chief economist with the National Energy Board and now the principal of Calgary-based Veracity Plus Consulting.
Those U.S. refinery configurations are achieving the same results as Canadian upgraders by adding cokers to break down hydrocarbon molecules, but at far lower prices than building new plants from scratch.
