11/30/2012 11:37 EST | Updated 01/30/2013 05:12 EST

Canadian Oil Sands sees continued volatility in light oil pricing

CALGARY - Growing North American light oil production is expected to cause crude from the Syncrude oilsands mine to fetch a discounted price, says Canadian Oil Sands Ltd., the largest partner in the massive development.

The company's 2013 outlook released late Thursday predicts its synthetic crude — light oil that has been upgraded from tarry oilsands bitumen — to get a price US$5 lower than West Texas Intermediate, a key U.S. light oil benchmark.

Canadian Oil Sands expects WTI to average US$85 per barrel next year. In the past, WTI and light synthetic crude have been relatively close in value.

"It's an area where we probably have the least science behind our predictions, so we've tried to be conservative," Canadian Oil Sands CEO Marcel Coutu said on a conference call with analysts Friday to discuss the company's budget and outlook for next year.

U.S. oil production has been rising from so-called "tight" reservoirs in places like North Dakota that had until recently been too technically challenging to exploit.

"There is more light oil coming into the refinery market in North America. There's no doubt about that," said Coutu, adding much of that crude is making its way to market by rail in the absence of adequate pipeline capacity.

"So I think that we will continue to have a discount for light product... and that is why we've put down this average $5 discount against what has been really a closer-to-par pricing for our product up to this point."

A report by the International Energy Agency earlier this month predicted the United States will be virtually energy self-sufficient by 2035, thanks in large part to booming light oil volumes.

Oilsands giant Suncor (TSX:SU) said recently that the economics of its Voyageur upgrader — which would upgrade its oilsands bitumen into synthetic oil in much the same way Syncrude does — are "challenged" as a result of growing U.S. light oil production.

There are pipeline proposals in the works to send more western crude eastward, where refineries would rather buy domestic oil than import it from overseas at a higher price.

Enbridge Inc. (TSX:ENB) submitted a regulatory application for such a project on Thursday and TransCanada Corp. (TSX:TRP) intends to formally gauge shipper interest in its plan early next year.

"I think the East Coast is a very good outlet for western crude. It serves our country well, as well as the economics of consumers," Coutu said on the conference call.

Coutu said he sees another growing source of demand for Syncrude's light oil.

He expects other oilsands producers to use more synthetic crude to dilute their bitumen, making it easier to flow through pipelines. Condensate, which is a preferable diluent, has been in short supply.

"Until pipelines are built to bring condensate in from further locations, synthetic will be a very competitive alternative. So that is another very good market for us," said Coutu.

"Synthetic buyers for diluent of course have to pay the same thing as a refinery does. It's just a shame that it has to get blended after we put so much work into it to create it. But we're getting our full price for it."

In Thursday's outlook, Canadian Oil Sands said it plans to spend $1.3 billion next year at Syncrude, about 63 per cent of which will go toward replacing and moving mining infrastructure and cleaning up tailings ponds.

Canadian Oil Sands owns 37 per cent of Syncrude. The other partners include Imperial Oil Ltd. (TSX:IMO), Suncor Energy Inc., Mocal Energy, Murphy Oil, China's Sinopec and Nexen Inc. (TSX:NXY), which has agreed to be taken over by another Chinese state-owned firm.

Canadian Oil Sands estimates Syncrude will produce 105 million to 115 million barrels per day, taking into account planned maintenance work that will take place in the second half of 2013.

In releasing its third-quarter results last month, Syncrude said it was expecting annual Syncrude production in 2012 of between 105 million and 108 million barrels.

Canadian Oil Sands shares fell 19 cents to $20.24 in afternoon trading on the Toronto Stock Exchange.