Oversupply still hurting oil producers in Rockies

Rocky Mountain oil producers are still smarting from an 18-month supply glut that has left their petroleum priced well below national averages.

Rising imports of oil from Canadian tar sands, increased domestic production and a series of refinery shutdowns have left the Rockies awash in crude.

At the peak of the oil surplus in February 2006, some Rocky Mountain producers were forced to sell their crude for $34 a barrel – a gap of nearly $26 from the prevailing national price then of about $60.

“The most obvious answer for this (price) decline has been an increase in Canadian crude that has been able to come down to the Rockies,” said John Kingston, global director of oil for research firm Platts.

The difference between national prices and a typical regional price in Wyoming has since diminished to $8 a barrel. But the margin remains a sore point and a topic of discussion for Western oil producers, particularly in the northern Rockies and Plains, where prices were the lowest.

“We encountered the problem, and it really caught us by surprise,” said Steve Frazier, Denver-based vice president of Klabzuba Oil & Gas Inc., a firm that operates mostly in Wyoming and Montana.

“It was a perfect storm that came together and really sent prices down,” said Frazier, who also serves as a Montana representative for the Independent Petroleum Association of Mountain States. “Everyone pretty much had to grit their teeth and deal with it.”

The Tulsa, Okla.-based Interstate Oil and Gas Compact Commission will hold a summit conference in Denver on Sept. 5 to discuss the pricing dilemma and search for ways to keep the gap at minimum levels, including the need for more refining capacity and oil pipelines.

The Suncor refinery in Commerce City has been a major importer of crude oil from Alberta’s vast tar-sands deposits over the past four years.

But the refinery has expanded its capacity during that period, allowing it to maintain or increase oil purchases from Colorado wells.

As a result, Colorado oil producers have escaped the brunt of the price gap. The differential between the widely reported West Texas Intermediate crude and Colorado oil reached $5.48 a barrel in late 2006 but never approached the higher gaps seen in the northern Rockies.

Oil surpluses and pricing problems have been worse for companies that drill in Wyoming, Montana and North Dakota.

Denver Post