It might be a good idea for Connacher to institute the idea that they are looking into concerning shipping bitumen from the Great Divide in rail cars to the refineries in Houston and the Gulf if bitumen prices continue to grow there, and bring the cars back north loaded with diluent to use and sell in Alberta in light of the following article which appeared in yesterday's Globe and Mail:

Breaking News from The Globe and Mail

Canadian crude fills Venezuelan oil gap

Nathan VanderKlippe

Sunday, June 21, 2009

CALGARY — Hugo Chavez's bid to ship Venezuelan oil to international markets is helping to create a flood of unexpected cash for Canada's oil patch.

The reason lies in a little-noticed – but vitally important – measure: the “light-heavy differential,” which is the gap in price between how much producers receive for a barrel of light crude and a barrel of heavy oil – the thick stuff that largely flows from in and around Alberta's oil sands.

Since heavy oil must face additional upgrading steps before it can be refined into products like gasoline and jet fuel, it sells at a discount. In recent years, that discount has been significant: last year, for example, it averaged 22 per cent.

So far this year, the average differential has dropped to 17 per cent; the most recent trades have been around 10 per cent.

That means there is now less than a $10-a-barrel discount assigned to heavy oil, creating a bonanza for Canadian producers like Canadian Natural Resources Ltd., Baytex Energy Trust, Nexen Inc. and Imperial Oil Ltd.

Venezuela's bid to export more of its heavy oil to China – and, in the future, potentially Russia and India as well – has combined with a drop in heavy oil supply from Mexico to starve U.S. refiners of product, especially those on the Gulf Coast that specialize in heavy crude.

In the past year, Mexican heavy crude output has dropped by more than 200,000 barrels a day. Venezuela's U.S. heavy oil exports fell by 94,000 barrels. That drop has left U.S. refiners scrambling to find enough heavy product, and bidding up the price of Canada's heavy production.

For every one dollar contraction in the differential, Canada's energy industry adds another $340-million to its annual top-line revenue, Martin Molyneaux, managing director of institutional research at FirstEnergy Capital, has calculated.

“It's very attractive for heavy oil projects, for bitumen projects. It's actually a very good business to be in right now,” said EnCana Corp. chief executive officer Randy Eresman. “I expect that activity in the province will likely be picking up on the oil sands.”

EnCana has already begun diverting some additional resources into its heavy oil projects.

Producers like Suncor Energy Inc. and the Syncrude mine refine their heavy bitumen into light crude oil. Since they don't sell any heavy oil, changes in the differential do not affect them. (Technically the differential is between two crude products: Alberta's heavy Western Canada Select, and the world benchmark West Texas Intermediate, or WTI).

But elsewhere the future impact could be dramatic, as some forecast that the differential could remain slim for years to come. A slate of planned U.S. refineries by Marathon, BP, ConocoPhillips, among others, will create a refining over-capacity of nearly 400,000 barrels a day in the next six years, the Canadian Association of Petroleum Producers has forecast. By 2015, CAPP says, North American demand for western Canadian crude will grow from 2.4-million barrels a day to 3.7-million. Nearly all of that growth in demand will come in the United States.

It could take until 2020 to once again achieve a supply balance, said Stephen Fekete, a Calgary-based managing consultant for international energy consultants Purvin & Gertz Inc.

“We're seeing the heavy-light spread get tighter for the next few years, and really potentially longer,” he said.

While it's good news to some heavy oil producers, this also strikes another blow to Alberta's $80-billion dream of an “Industrial Heartland” packed with rows of upgraders near Fort Saskatchewan.

Upgrading margins are directly tied to the differential – wider is better for profits, since an upgrader takes heavy oil and makes it into light oil.

A narrow spread going forward will make it difficult to build upgraders in Alberta, Mr. Fekete said.

But others are skeptical.

A tight differential “may in the short-term encourage people to develop bitumen” and increase the supply of heavy oil – once again decreasing demand pressure, said Nexen chief executive officer Marvin Romanow. “But as soon as you do that, the differential widens.”

And upgraders are built for many decades of production, meaning current differentials are largely irrelevant, said Ian MacGregor, chairman of North West Upgrading Inc., which has plans to build a new upgrader and carbon capture project.

“You're building a 50- to 100-year asset when you build an upgrader,” he said.

“You have to look at long-term averages for these things, and they're basically self-correcting.”

© The Globe and Mail

Best Wishes; Scott