Devon Energy chief executive John Richels is confident that US President Barack Obama’s administration will approve the the Keystone XL pipeline, but he expects the gap between prices for Canadian heavy oil and US benchmark West Texas Intermediate (WTI) to narrow even if the pipeline never gets built.
“Keystone XL is going to be approved,” Richels told attendees of the Independent Petroleum Association of America’s Oil and Gas Investment Symposium in New York on Tuesday. “From a national point of view it makes no sense for the President not to approve that, and buy more oil from Venezuela and the Middle East.” The Keystone XL pipeline, as envisaged, would transport up to 830,000 barrels per day of Canadian oil from Alberta to US refineries.
In addition to the rationale from the US side, Richels argued that Canadian interests are also likely to help propel the project forward.
“When you get into these heavy oil projects, Alberta and the federal government have got a ton of skin in the game,” Richels said. “They are going to get that oil out of there, because it provides revenue.”
The addition of new pipeline capacity linking output from Canada’s oil sands to US refineries and markets should help to reduce the discount of Canadian heavy crude relative to other grades of oil, such as WTI.
This would have positive implications for Devon, which has 100% interest owner in the Jackfish steam-assisted gravity drainage (SAGD) oil sands project, which should produce 105,000 b/d when its third phase is complete, and a 50% stakeholder in and operator of the Pike project, which is currently seeking regulatory approval to move forward, and could eventually produce 175,000 b/d.
But that differential is set to narrow whether or not Keystone gets approved and built, according to Richels.
“Even in the absence of that, there’s a lot of stuff happening,” Richels said. “There are a number of projects coming on, and there’s going to be more takeaway capacity that’s going to come into effect.”
Richels noted that differentials have already begun to shrink since the beginning of this year. “First quarter of 2013, differentials were still pretty high, and in the second quarter they’ve come way down,” he said, noting that they have been as little as $14/bbl in recent days, down from $42/bbl in January.
Devon anticipates that differentials will widen again in the middle of this year, owing in part to refinery turnarounds that temporarily push capacity offline. “But in the latter half of 2013 – so prior to Keystone or anything like that – those differentials narrow fairly significantly,” he said, citing additional pipeline and refining capacity due to come onstream later this year, such as a modernization project at BP’s Whiting refinery scheduled to wrap up in the second half of 2013.
But the company’s assumption that long-term differentials would continue to trade at historical norms have changed since the company made the decision to invest in SAGD projects in Canada.
“The historical norm, if you go back 15 years, is around 31-33% of WTI,” Richels said. “Going forward, we believe that it’s going to be more like in the mid-20%’s – always with some volatility.”