Heavy Oil Investing News Commentary

The heavy oil sector has seen renewed interest lately as prices for July delivery of light sweet crude hit $134.22 on the New York Mercantile Exchange. A potential oil workers’ strike in Nigeria and combative rhetoric from Iran have contributed to the climbing price. With oil prices so high, heavy and unconventional oil sources have become more profitable, spurring investment. International activity in recent weeks suggests that companies and markets expect high oil prices to continue for years. http://tacticaltutor.com/best-hand-ice-auger/.

Venezuela’s state owned oil company PDVSA announced yesterday that it would accept bidding for three blocks in the Orinoco belt. Significantly, PDVSA specifically mentioned that bidding would be open to private companies, a departure from Hugo Chavez’s 2007 sweeping nationalizations in the energy sector.

Saudi Aramco made a major announcement this week that it would expand refinery capacity in the country by almost 80% in the next five years. The state-owned oil giant will focus much of the new infrastructure on dealing with the heavy, sour oil from the country’s Ghawar and Manifa fields.

Closer to home, Canada’s energy sector has seen much activity in the past week. The TSX benchmark index rose to a new record high this morning, largely due to a rally in oil and gas shares, but receded slightly over the afternoon. Imperial Oil Ltd. benefited from the Federal Cabinet lifting a court-ordered injunction against the proposed Kearl oil sands mine. Though the Cabinet’s decision allows the CDN $8 billion project to go ahead, lawsuits by environmental groups represent potentially large liabilities to new oil sands projects.

In other Canadian energy news, Vancouver-based Ivanhoe Energy Inc. announced last week that it was planning an oil sands processing plant in Alberta using new technology. The HTL technology enables operations to burn off the least useful bitumen on site. HTL’s promise is in its energy efficiency and the reduced need for naptha diluent to enable transport. Sited on land acquired from Talisman Energy Inc., HTL has drawn interest from unconventional oil producers the world over.

These recent developments give a clear picture of the potential benefits and risks of investing in heavy oil. As prices rise for conventional oil, production of bitumen will necessarily increase. Investment in Alberta’s energy industry promises to greatly increase production in coming years. Political uncertainty and enforced cooperation with state-owned oil companies in Venezuela, Mexico and Saudi Arabia add risk to investment.

In Canada, the financial and political climate is much more stable, but different risks are present. With the American Presidential election due in five months, both candidates are stressing their environment credentials and pledging “energy independence”. As Alberta’s energy industry is among the most carbon-intensive in the world, environmental concerns on both sides of the border are significant potential liabilities. Already, laws have been proposed in the US that would penalize carbon intensive fuel production by banning its use in government-owned vehicles.

Overall, the enhanced activity and huge investments in heavy oil confirm its growing importance. If breakthroughs such as Ivanhoe’s HTL process succeed, operating costs can be reduced, enhancing the profitability of unconventional oil. Growing energy demand from the developing world will likely keep oil prices high in the years to come, so there is not much risk of heavy oil becoming unprofitable. However, increased environmental sensitivity poses potential problems for heavy oil producers, specifically in Canada.