The growing importance of Canadian crude oil could soon be rewarded with the ultimate status symbol, at least in oil market terms: a crude futures contract.
Canadian oil producers say they're in negotiations with investment banks and commodities exchanges over the development of a futures contract for their heavy crude output. A contract on the New York Mercantile Exchange or the IntercontinentalExchange for Western Canadian Select, a blend of heavy Canadian crudes, could be created in the next year if sufficient liquidity can be attained, these people say.
We've spoken to the ICE and Nymex many times to see how we can set up a contract, said Walt Madro, senior vice president of crude oil marketing at EnCana Corp., Canada's largest energy company. They're chasing this very aggressively. We wouldn't be surprised if they started providing quotes within the next 12 months.
At present, Canadian firms trade their crude through private, over-the-counter deals with buyers such as refineries. The lack of transparency inherent in the OTC system means companies don't know what price their future supplies will achieve, creating uncertainty over revenue projections.
That's a problem producers would like to solve, considering crude output from Alberta's oil sands is expected to triple to 3 million barrels a day in 2015 and U.S. refiners are showing greater interest in taking Canadian heavy output. ConocoPhillips recently agreed to a huge supply deal with EnCana, while BP PLC and Marathon Oil Corp. have also said they're keen to source supply of more Canadian crude.
Having a contract provides a great deal more liquidity with respect to moving volumes, while providing improved price disclosure, said Rod Wilson, manager of domestic crude supply and natural gas liquids at Petro-Canada. It's a better instrument for companies to lay off risk.
Both Nymex and the ICE refused to comment on the possibility of setting up a heavy crude contract. However, Nymex said earlier this month it had obtained authorization to offer the use of its electronic clearing and trading systems in Alberta. Meanwhile, the Toronto Stock Exchange owner, TSX Group Inc., is also mulling the introduction of a Canadian crude oil contract.
Strong support in Canada for a heavy crude contract doesn't mean it will happen or be successful. New contracts frequently struggle to take away trading volumes from the traditional WTI and Brent benchmarks, resulting in an illiquid contract that's unable to attract traders. This month, a contract for Russian Export Blend Crude Oil, or REBCO, was launched on Nymex, but trading volumes haven't yet taken off.
However, the Canadian producers see a futures contract as a natural progression for their attempts to position Western Canadian Select as a North American benchmark for heavy crude. The blend, which consists of Canadian heavy conventional and bitumen crude oils, blended with sweet synthetic and condensate diluents, was launched by four producers _ EnCana, Petro-Canada, Canadian Natural Resources Ltd and Talisman Energy _ in late 2004. Production runs are at around 250,000 barrels a day, compared with the West Texas Intermediate and Brent benchmarks, both of which are near 350,000 barrels a day.
An issue that the WCS producers still need to resolve is what hub the crude for the contract will be delivered to, and how to get sufficient volumes there. It's the million-dollar question, said Petro-Canada's Wilson. In order to make a contract work properly, crude has to get to a hub.
West Texas Intermediate futures on Nymex are sold for delivery at the pipeline hub at Cushing, Okla., a site that Canadian firms would ideally like to deliver their crude to as well. However, pipeline capacity from Canada to Cushing is limited by a lack of infrastructure, potentially holding up the development of a contract, Wilson said.