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Alberta Oil sands vs OEPC Market Supply and Price – Part 2

This article is a continuation part two of three. Read part 1 here:

With a viable world market within striking distance, I will argue that the only method for inducing a change in OPEC behaviour is to ‘steal’ import supply from the United States. It is unlikely that strong>oilsands products will make it to any other world market due to logistic costs. Shipping oil to the nearest transport hub, likely in British Columbia, would be the only alternative for sending crude to the market abroad. It is more efficient to create and build upon the existing transportation system directly to the United States. As a result, there is potential for oilsands exports to replace OPEC exports to the US. However, the only method of achieving this is by increasing current output and reducing lifting costs. The question of whether US importers will increase their Alberta consumption for oil is dependent on the cost. Is it cheaper to construct a pipeline directly from oilsands projects in Alberta, or is it cheaper to import from the Middle East? Regardless of location, the consumer, or in this case the nation, will import the lowest cost product. This suggests Saudi Arabia will continue to export crude to the United States so long as they can maintain lower costs. The higher transportation costs are compensated by the lower marginal lifting costs. Thus, one of the major factors in determining the success of the oilsands export market will hinge upon the producer’s ability to maintain an affordable product under market conditions. Presently this is the case, high market prices support the market for expensive bitumen exports.

Potential Size of United States Export Oil Market

Currently, Alberta accounts for over 10% of total American imports of crude oil. It is feasible this value will increase when oilsands production expands so long as it remains cost effective to the importing market. Using data primarily from the BP Statistical Review of World Energy for 2004, with some data components from the Alberta Energy Department, one can extrapolate future US crude import volumes and percentage share amongst importers. In the ten year period between 1993 and 2003, the United States experienced declining production while supporting an increasing consumption trend. Imports therefore steadily increased throughout this period. The result of an expanding import market share is good news to the oilsands producer, especially with declining world reserves. Examining 2002 import market share states Alberta alone contributed 11.3% of total US imports for crude oil, or about 1,018 thousands of barrels per day. This value is expected to increase to approximately 2.7million barrels per day in the year 2012. Saudi Arabia accounted for 16.8% of total crude imports and Venezuela was responsible for 13.2%. Only two OPEC producing nations will be considered in this example since expected future output from bitumen reserves in year 2012 cannot displace all OPEC exports to the US. I chose to include the largest two exporters and will account for their potential losses from an expanding oilsands industry.
Assuming market conditions remain favourable for oilsands production, and the target volume in 2012 is achieved, how could the US import market appear? Using regression analysis on US imports, and OPEC production, one can extrapolate future market shares and make assumptions regarding possible OPEC losses. Excluding any future market shocks from either supply or demand, US imports in the year 2012 will amount to approximately 16.045 million barrels per day. This is an increase of about 32.2% from the year 2002. Increasing the import percentage share of the three producers mentioned above by 32.2% will provide 2012 daily export values. Using the 2.7million bbl/d oilsands value, and subtracting the future export volume of Alberta crude, will provide a residual value which can be applied to an increase in export volumes. Assume for a moment this entire quantity is exported and none is consumed domestically. 10.77% of OPEC’s entire production in 2012 may be attributed to the US import market, if the oilsands surplus is applied solely against OPEC’s share, it will be reduced to 6.71%, or a loss of about 494 million barrels per year. The absolute maximum Alberta oilsands could displace total OPEC production in year 2012 is just over 4%. Is this value large enough to attract the attention of OPEC? Will OPEC prefer to hold oil reserves for future production while watching the oilsands deplete, or will they attempt to recapture the lost market share?

[tags]us oil, energy prices, opec prices, bpd[/tags]

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