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Oil Update—February 2024

For March, West Texas Intermediate (WTI) oil prices should range between $70 and $90 per barrel. This is an increase of $5 per barrel from last month. A narrower range is between $75 and $85 per barrel.

For most of last month, prices were tightly packed between the low- and high $70s. As the month wore on, prices crept higher. For March, I expect more of the same, just slightly higher prices.

Because of my prior work experience with Syncrude many years ago when I was part of the team that created the oil sands generic fiscal regime and because I invest in oil equities, I have always have an active interest in oil sands developments. One article that caught my attention last month was a Bloomberg article “The $10 Billion Mistake That Will Revive Canadian Oil” (subscription required) by Javier Blas. One paragraph in particular stood out:

Despite its colossal cost, TMX had two advantages that may compensate for the financial folly. One is that it’s likely to narrow the differential between Canadian and US crude, leading to higher revenue for everyone involved in the petroleum industry — and that includes provincial governments which take royalties. How much the discount would narrow is hotly debated. On average, it has averaged minus $17 a barrel between 2010 and 2024. The consensus is, that’s going to trend now toward minus $10 a barrel. Crucially, TMX probably means that the differential will no longer suffer from its perennial blowouts, when it has widened to as much as minus $40 and even minus $50 a barrel. Second, it should facilitate investment in new production, leading to higher tax revenue.

Canadian heavy oil, known as Western Canadian Select (WCS), sells at a discount to WTI. As seen from the quoted paragraph, this differential can vary widely over time.

Intuitively, higher WCS prices for producers is a good thing. But what if that producer is an integrated producer?

Integrated producers upgrade their crude bitumen to synthetic crude oil (SCO), which typically trades at or near the same prices as WTI. Alberta royalties are assessed against bitumen prices. If bitumen prices rise, then so, too, do royalties. An integrated producer, however, does not enjoy increased revenues because its revenues are dependent upon its final product, SCO. In other words, its intermediate product, crude bitumen, has increased in value and requires a higher royalty payment, while its final product still sells for WTI prices.

For those wanting more information on oil sands royalty framework, I refer you to the Alberta government website: “Oil sands royalties – Overview.”

WCS is different from crude bitumen in that diluent has been added to crude bitumen. The end result, though, is that bitumen is more valuable than it was before the change in differentials.

A non-integrated producer or bitumen only producer will have higher revenues, royalties, and profits. Integrated operations, though, will have higher royalties, same revenues, and thus lower profits.

Returning to the main topic, I expect WTI prices to stay generally within $75 to $85 per barrel, with an additional $5 on either side for any minor excursions.

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