Remaining bullish on oil sands, carbonates

Posted By Dick Sterling
January 30, 2013

Bitumen producers are getting hammered right now, and (as usual) the politicians are to blame. That's good news for patient investors, as I'm about to show you.

Background: Canadian bitumen producers have been taking a severe hit on the price per barrel they are receiving, with some projects barely breaking even. It's not because oil prices are too low. Rather, the problem stems from lack of pipeline access/capacity.

The US shale oil explosion has hogged available pipeline capacity and Canadian bitumen producers are unable to get their product to market.

Imagine if you were a farmer and you produced milk but you were being prevented from shipping your product into the large urban centers. Instead, you were forced to sell it locally, resulting in a regional glut and therefore lower prices.

Despite the challenges, Canadian bitumen production is slated to increase by an additional 540,000 barrels per day during the next three years, the majority of which costs around $60 a barrel to produce. The pressure is therefore mounting to get additional pipeline capacity in place.

The other problem is this: almost 100% of Canada's bitumen exports go to the US. It needn't be that way. Asian customers would readily buy it if there were a pipeline to the West coast. Again, the problem is lack of pipelines.

US oil inventories are at record levels. That's due to shale oil production, which is increasing and expected to keep growing for years. Current production of US crude is 7 million barrels per day, and one forecast puts it over 11 mm bpd within ten years. That's bad news for Canadian bitumen producers, right? Maybe not. As long as international demand keeps growing, world oil prices will remain strong.

It's true that bitumen is expensive to produce. It's also true that production from oil sands (and carbonates) is projected to increase. But thankfully, the pressure to expand pipeline capacity is very high and the politicians feel it. They've over-regulated the industry for decades, resulting in limited capacity and now a bottleneck. Bitumen prices are hurt, and royalty revenues to the government have dropped. The politicians are under the gun, and industry observers are optimistic that more pipeline capacity will come online, although not immediately.

Therefore the long term outlook is very favorable for oil sands producers and also for emerging carbonate-hosted bitumen players, largely because of massive international demand. The market capitalizations of small and emerging bitumen producers have taken a hit, but that means opportunity for forward-thinking investors who are willing to think outside the box. Alberta's bitumen resources are massive, their technical people are outstanding, and the political risk is close to zero. Stability, proximity, and consistency make it an excellent long term speculation.

Posted by: Dick Sterling, Editor   contact here