June 19, 2008

Bitumen Price and Methodology

The Soaring Oil prices although justifies the fluctuation in the pricing of bitumen, there is not an established mechanism to derive the bitumen price till date. The bitumen market is getting mature and liquid. The majority of the exporting nations include Singapore, Iran, Saudi Arabia, Egypt, Thailand in this region has different inputs and the range varies significantly.

Recently the Cartel led by Shell was exposed by the European regulators and the was fined to the tune of price fixing on various petroleum products.

For Bitumen, there are no posted prices except for some compiled prices from some paid subscription services ; marketers rely on a number of pricing formulas that reference various posted crude qualities.
Market pricing is seasonal with higher prices during peak season like summer being the norm due to higher demand for bitumen and other bitumen derived products.

By necessity, bitumen is regularly blended with diluent (typically in the form of C5+or synthetic light crude) in order to facilitate its transportation via pipeline to tankers.

As such, the effective field price for bitumen is also directly impacted by the input cost of the diluent required, the demand and price of which is also seasonal in nature (in winter as colder temperatures necessitate more diluent for transportation).

Consequently, bitumen pricing is notoriously high in summer and during major shutdown by the refineries and not reflective of the annual average realized price or the economics of the business overall.
The strong bitumen demand disturbs the effective field prices during peak season for a variety of reasons. In addition to the usual seasonal issues, increase in bitumen demand and the premium for diluent was significant as a consequence of various events such as production interruptions at a regional refinery.

The absence of a generally recognized approach to the determination of appropriate bitumen pricing, coupled with the pricing seasonality (which has not been sufficiently addressed ) meant that any number of interpretations existed as to how year-end bitumen prices should be determined, for the purpose of filing to the regulatory authorities, as well.

With billions of barrels of potential and billions of dollars of planned capitalinvestment, the bitumen resources are widely understood to be a cornerstone of future energy requirements and are attracting notable attention from overseas jurisdictions as well.

It is in the best interest to all stakeholders (investors, capital markets, regulatory bodies, producers and the public at large) that a year-round bitumen pricing methodology be established that reasonably reflects the general market conditions and is not unduly influenced by seasonal demand, weather-driven or cataclysmic price movements.

In fact, the adoption of the proposed methodology for all crude qualities would have little or no effect on reported proved reserve quantities for all categories, bitumen excepted. For no other reason than bitumen alone is subject to the extreme seasonality in realized prices around calendar.

Some industry watchers propose to determine the constant price for bitumen by using, for the benchmark reference price, the published price for the crude oil after applying historical adjustments (meaning the average of the adjustments for the 12 months preceding the date of the estimate) for transportation and for quality, which create the price differential between crude oil and bitumen.

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