Oil Sands: Will the 'Greens' Cause Us to Miss Out?

Includes: COSWF, DBO, ENY, OIL, SU
by: Jim Kingsdale

The July 7, 2008 Oil and Gas Journal features several pieces on the Canadian oil sands.   I’m not going to attempt to summarize it all; much of it is technical information regarding the various ways to treat bitumen, which is what you get out of oil sands before starting to refine it.   Interested persons can get a copy on line or by mail.

Let me simply summarize a few points that are relevant to  investors. 

  First, total Canadian oil sands production is expected to grow from the current 1.32 mb/d to 3.23 mb/d in 2017. 

  Second, pipeline capacity must be expanded to enable growth.  A 500 kb/d pipeline is expected to become operational soon.  More are on the drawing board that may link Alberta to the Gulf refineries and to ports from which shipment to Asia is feasible.  In fact one was just announced, as follows:

Alberta-based TransCanada Corp. and Houston-based ConocoPhillips Co. said yesterday that they will add 500,000 barrels of daily capacity to the 1,980-mile Keystone Pipeline, which connects Hardisty, Alberta, with a delivery point near terminals in Port Arthur, Texas

Third, the U.S. refineries that buy oil sands  production may change their needs over time as alternative oil of differing qualities become available.  Most people think oil is a fairly standard issue commodity, but those closer to the scene know that there are many grades of oil and each is best suited to make slightly different end products.  It is not clear that synthetic crude made from oil sands by, say, Canadian Oil Sands Trust will always command a premium price to WTI.   It could become less desirable depending on available alternatives.

   Fourth, and potentially most important, the U.S. “green” lobby is pushing legislation that could limit purchases of oil sands products by U.S. government agencies based on its GHG footprint.  It would be well beyond stupid for Congress to prohibit our buying oil from Canada while we increase buying it from countries that threaten our security.  But just because something is stupid certainly does not mean Congress may not do it.

My guess is that any such setback to demand for oil sands products would be quite short lived.   I have no doubt that China, among others, would be very happy to be guaranteed a supply of oil from Canada if the U.S. does not want it.  There might be some demand disruption as distribution pipelines are built but eventually the oil sands products will find a ready market. 

In fact it is hard for me to imagine that in the fullness of time, as it is said, the Canadian oil sands companies will not be among the most secure success stories in the energy business.  As I’ve mentioned, the S.E.C. has asked for comments on a proposed rule making that would allow public companies to count oil sands assets among their proved reserves.  I think that when/if that happens there will be a strong demand by oil majors for Canadian oil sands assets and the public oil sands companies will tend to get bid up to premiums.

Investors who want a broad based vehicle for participating can use the Claymore Canadian Income Trust ETF (NYSEARCA:ENY).  I prefer either of that ETF’s top two holdings, Canadian Oil Sands Trust (OTCQX:COSWF) or Suncor (NYSE:SU).  But the ETF gives you diversification with a heavy emphasis on oil sands operators.