Low oil prices squeezing Canadian heavy oil economics

Value of Canadian Bitumen at the field [92,943 bytes] Canadian producers of heavy oil and oilsands bitumen have seen a dramatic decline in the value of their production during the past 2 years. The recent plunge in oil prices has aggravated that problem, making heavy oil a money-losing proposition in Canada. A similar situation exists for many producers in California, where heavy oil production dominates (see related story, p. 22). As light crude oil prices fell, the differential between light

March 30, 1998

2 min read

Value of Canadian Bitumen at the field [92,943 bytes]

Canadian producers of heavy oil and oilsands bitumen have seen a dramatic decline in the value of their production during the past 2 years.

The recent plunge in oil prices has aggravated that problem, making heavy oil a money-losing proposition in Canada. A similar situation exists for many producers in California, where heavy oil production dominates (see related story, p. 22).

As light crude oil prices fell, the differential between light and heavy oil prices widened and the cost of diluent for bitumen transportation increased.

According to the Canadian Energy Research Institute (CERI), the net value of bitumen to the producer has dropped to less than $5/bbl (Canadian) on average. For some projects, this wellhead price is close to zero or negative. Prices generally are below those needed to cover operating costs, let alone capital costs.

Swelling production

CERI Pres. Gerry Angevine said, "Both a correction in light crude oil prices and an increase in light/heavy differentials were anticipated in the institute's recent study of market potential. However, the extent to which Canadian heavy oil and bitumen production volumes have grown and depressed heavy oil markets has exceeded expectations."

The current situation indicates that individual Canadian producers are competing among themselves for available markets, rather than with Venezuelan and Mexican producers.

Meanwhile, CERI has several studies planned that will provide insight into heavy oil market developments and investment opportunities.