[R-G] Tanker serves as oil stockpile

[Anthony Fenton]

http://www.thenational.ae/article/20090207/BUSINESS/386867450/0/FORIEGN

Tanker serves as oil stockpile

Tamsin Carlisle

     * Last Updated: February 07. 2009 6:41PM UAE / February 7. 2009  
2:41PM GMT

In the latest sign that energy producers are still pumping too much  
oil, Koch Supply and Trading, the US oil firm, has booked a  
supertanker for six months to store about 2 billion barrels of crude  
off the east coast of the Emirates.

The move to stockpile oil at sea near Fujairah, a Middle East fuel  
bunkering hub, is part of a worldwide trend towards offshore storage  
that has developed because onshore oil depots are full, and most oil  
traders expect prices to rise in coming months, analysts said.

But it also means global oil demand is falling faster than producing  
countries, primarily those within OPEC, are cutting output.

“Demand is so bad at the moment, where are you going to push the oil  
to?” asked a crude oil trader.

The UAE recently told customers it would reduce contracted March crude  
deliveries in line with the lower OPEC production target announced in  
December, when the organisation pledged to cut output by a record 2.2  
million barrels per day (bpd). Saudi Arabia, the world’s biggest oil  
exporter, has already cut production to 7.9 million bpd, its lowest  
level since Oct 2002, and below the kingdom’s 8.05 million bpd OPEC  
quota.

Yet, for the next few months, the tanker, Artemis Glory, will be  
anchored off the
southern tip of the Arabian Peninsula, ready to receive Gulf oil  
production in excess of immediate demand. Those supplies are most  
likely to come from Oman, a small non-OPEC producer intent on  
increasing its crude output, and Iraq, which is exempt from OPEC  
quotas as it rebuilds its shattered energy infrastructure, traders said.

Meanwhile, oil stocks in the US, the world’s biggest market, hit their  
highest level in 18 months last week, rising by 7.2 million barrels.  
At the nation’s main storage facility at Cushing, Oklahoma, the  
delivery point for crude traded on the New York Mercantile Exchange,  
inventories rose by 800,000 barrels to a record 34.3 million barrels.

According to Merrill Lynch, that is because Canada has been flooding  
the US Midwest with oil from its oil sands, resulting in “a major  
supply glut” around the Cushing depot.

That development has already put strong downwards pressure on the  
price of the North American benchmark West Texas Intermediate (WTI)  
crude, keeping its price close to US$40 a barrel in recent weeks. So,  
should the price of oil fall by another $10 per barrel, it could be  
due to Canada maintaining a “continuous flow of Canadian crude”  
through pipelines linking its oil production centres to Chicago and  
Cushing.

The Merrill Lynch Canadian equity research team said in a report it  
estimated that existing Canadian oil sands projects “should generate  
positive cash flows all the way down to about $32 per barrel WTI”.  
“Thus, should the OPEC output cuts fail to balance the global oil  
markets, WTI crude oil prices may need to temporarily dip below this  
level to force a reduction in Canadian oil flows.”

Canada is by far the biggest exporter of oil to the US. In November,  
the latest month for which the US government provides data, it  
exported nearly 76 million barrels of crude oil and refined products  
to its southern neighbour, compared with 45 million barrels from the  
number two supplier, Saudi Arabia.

The biggest Canadian oil production centre is the Athabasca oil sands  
region of the country’s western province of Alberta. The Athabasca is  
the world’s largest crude deposit, containing an estimated 1.7  
trillion barrels of oil, of which at least 179 billion barrels can be  
recovered with existing technology. Canada exports about half of its  
oil sands output of about 1.2 million bpd to the US, with much of that  
flowing to refineries near Chicago and Cushing that have special  
equipment for processing the tar-like crude.

Not all of those refineries are operating at full capacity. Marathon  
Oil, which has major refining operations in the US Midwest, is one of  
several refiners that have cut processing in response to lower fuel  
demand. Others with refineries near Chicago or in Oklahoma include  
ConocoPhillips, Valero and Sunoco.

That means less Canadian oil is being delivered to US refineries,  
while more is being stored at Cushing, forcing excess oil from the  
Gulf, the North Sea, and other producing regions that ship oil to the  
US, into floating storage.

The sticky crude that Canada mines or steams from its oil sands is  
some of the world’s most expensive to produce. Recent studies by the  
Canadian Energy Research Institute and the Canadian Associate of  
Petroleum Producers estimate that crude prices of $80 to $90 a barrel  
would be needed for new projects to achieve a 10 per cent return on  
investment.

At current prices, even oil sands producers with established projects  
are losing money. Royal Dutch Shell, the only major international oil  
company to have broken down its year-end financial results by product,  
last week reported a fourth-quarter loss of $30 million (Dh110.1m) on  
its Canadian oil sands operations. Petro-Canada, a large Canadian oil  
company with extensive oil sands operations, lost C$691m (Dh2.07  
billion) in the final three months of last year, compared with a C 
$522m net profit a year earlier.

But for operating decisions, oil producers watch cash flow, which  
excludes non-cash costs such as depreciation. And the huge open-pit  
mines and steam-injection facilities that are part of oil sands  
operations are expensive to stop and start.
That is why OPEC, when it meets next month to decide whether to cut  
output further, should keep an eye on Canada.

“This year and next, the US could continue to suffer from an  
oversupplied crude oil market on the back of a bleak demand picture,”  
Merrill Lynch predicted. “Should consumption in other parts of the  
world deteriorate further in the next few months, the supply glut in  
North America could continue.”

tcarlisle at thenational,ae