(Adds quotes, details on other heavy crudes)
By Nia Williams
CALGARY, Alberta, Jan 6 (Reuters) - Benchmark Canadian heavy
crude prices crashed below $20 a barrel on Wednesday, the lowest
in at least a decade, piling more woe on one of the world's
highest-cost oil patches and driving much of the sector deeper
into the red.
With variable cash costs at some of the largest of Alberta's
vast oil sands operations estimated at above $40 a barrel, the
14 percent plunge in outright Canadian heavy prices this week
may finally force some weaker players to consider shutting down
operations rather than racking up losses on every barrel they
extract, analysts said.
On Wednesday, U.S. crude futures CLc1 slid nearly 6
percent to as low as $33.77 after data showed the biggest weekly
build in gasoline stocks since 1993.
Western Canada Select (WCS) heavy blend crude for February
SHRWCSMc2 delivery traded at a discount to WTI of around
$14.05, according to Shorcan Energy brokers, putting the
absolute price of the Canadian oil sands benchmark blend as low
as $19.72 a barrel. It had averaged $23.57 in December.
The sharp price slump was the latest bad news for oil sands
operators who have watched the price of their crude, among the
world's cheapest because of its difficult-to-refine density and
high cost of transportation to the main U.S. buyers, plummet
from more than $85 a barrel in 2014.
"This is a very, very harsh reality for heavy oil
producers," said Judith Dwarkin, chief economist at RS Energy
Group in Calgary. "They are - as they spent most of last year
doing - trying to survive by cutting costs, increasing
production to generate cash flow and borrowing if they can."
Northern Alberta's vast oil sands hold the world's
third-largest crude reserves but carry some of the highest
production costs globally due to energy-intensive production.
Most companies will likely keep producing even if the crude
price does not cover cash operating costs, cushioned in small
part by the Canadian dollar's fall to a 12-year low versus the
U.S. greenback. The companies sell their crude in U.S. dollars
but pay costs in loonies. CAD/
Royal Dutch Shell RDSa.L , whose Albian Heavy Synthetic
crude produced at its Scotford, Alberta, upgrader was trading at
an even deeper $15.55 per barrel discount to U.S. crude on
Wednesday, is not considering slowing or shutting down oil sands
production, said spokesman Cameron Yost.
"We believe in the long-term fundamentals of the industry,
and these are operations that have long operating life spans of
30 to 40 years," he said. Shell also produces light synthetic
crude, which trades at a higher price, and sends most of its
output to its nearby Scotford refinery.
But others could be running out of options, according to
Barclays (L:BARC) oil analyst Warren Russell.
"There may be situations where people are either reaching
the end of the line on their capital available or have an
outlook that's particularly bearish. If you were in that camp,
there's potential you could shut in production," he said.
UNDERWATER UNDER U.S. CRUDE $40
A January presentation released by producer Canadian Oil
Sands Ltd COS.TO , which is fending off a hostile takeover bid
from competitor Suncor Energy SU.TO , showed the average
breakeven U.S. crude price at 10 of the biggest oil sands
projects is $41 a barrel.
The analysis includes mining and upgrading projects such as
Imperial Oil's IMO.TO Kearl facility, which produce
higher-priced light synthetic crude oil SHRSYNMc2 . But even
most of those projects are in the red at current prices.
For producers of heavy Canadian grades aside from WCS, the
economics are even worse. Sour crudes such as Cold Lake,
produced by companies including Imperial and Cenovus Energy
CVE.TO , and Access Western Blend, produced by MEG Energy
MEG.TO , typically trade another $1-$2 a barrel lower.
(Editing by Jonathan Oatis)