Growing Canadian oil exports to U.S. bittersweet for producers as price discount bites

Date of Article: Febrary 7, 2013

Source: Financial Post

Author: Yadullah Hussain


The American Petroleum Institute’s recent claim that the United States has “become a global superpower on energy” may have given many in Canada cause for even more concern than they have already experienced lately.

The API can be forgiven for its chest-beating as its boast is backed by declining U.S. energy imports and the oil and gas gushing out of a number of light-shale plays dotted across the country.

But a deeper dive into the data shows Canadian oil exports to the United States have actually risen over the past decade in real and percentage terms.

In 2002, Canadian crude accounted for just less than 16% of all U.S. imports, a figure estimated to have reached 28% by the end of 2012. While overall U.S. oil imports have declined, Canadian crude shipments south of the border have risen by a third.

“Growing Canadian imports from oil sands projects effectively pushed out waterborne imports of heavy crude oil from less stable regions, such as Mexico or Venezuela,” said Sabine Schels, analyst at Bank of America Merrill Lynch.

This is bittersweet for Canadian companies. Cornering the U.S. market has come at a heavy price in the shape of depressed prices fetched by the Western Canada Select, the heavy Canadian crude.

The discounts on Canadian heavy crude are forcing companies including Suncor Energy Inc. to delay plans worth billions of dollars and depressing their bottom lines.

The U.S. Gulf Coast will be a critical part of the future for oil sands
In a desperate effort to escape the dreaded $30 discount they must offer U.S. refiners, Alberta-based companies are seeking ways to ship their crude out of Alaska, Atlantic and B.C.

But Canadian producers know their biggest market remains the United States.

“Overall the U.S. Gulf Coast is a huge crude oil market — nearly equivalent to all of China today,” IHS CERA, an energy research consultancy, said in a report. “Consequently, the U.S. Gulf Coast will be a critical part of the future for oil sands, particularly for bitumen blends.”

TransCanada Corp.’s CEO Russ Girling knows this, which is why proposes a pipeline to the Atlantic to take Alberta crude not just to global markets, but back into the United States.

“It’s not a Plan B, it’s a Plan A, and it will go if the market supports it, along with Keystone,” Mr. Girling told Bloomberg. “Once you get on tidewater, you can get anywhere, and you don’t need a presidential permit to bring oil into the Gulf Coast.”

IHS expects oil sands volumes to the Gulf Coast to increase considerably as more than two million barrels per day of new pipeline capacity planned is expected to connect Western Canada to the Gulf Coast in the next three years — that is assuming it is approved and gets built.

Clearly, Canadian producers are caught in the U.S. orbit and will remain in its vortex for the foreseeable future.

It could have been much worse.

Unlike their natural gas counterparts who have been dealt a double blow of plunging exports to the U.S and plummeting prices, Canadian crude is popular among U.S. refiners and there’s more to it than just being the cheapest crude on earth.

Many U.S. Gulf Coast refiners are addicted to heavier crudes, and don’t have a taste for the lighter crude churned out from Texas and North Dakota shale plays.

Which is why while light blends from places like Nigeria and Angola have declined dramatically, Canadian heavy has been in the ascendancy.

John Powell, senior petroleum analyst with the U.S. Department of Energy, expects more sweet crude to be replaced by home-grown blends from places like Eagle Ford, but heavier crude imports will hold their own. “In 2013, we see imports, wherever they come from, probably going to get heavier, ” he said.

The Canadian surge has come as other sources of heavy crude face structural issues.

“Mexican heavy supply is expected to decline, and there is uncertainty around future supply from Venezuela,” IHS said. “If oil sands could displace most of the Mexican and Venezuelan imports, the opportunity for bitumen blends would be about 1.5 million barrels per day.”

U.S. tight oil will grow, but it is still going to leave a lot of room for other suppliers, said Jackie Forrest, senior director at IHS CERA.

“Canada is specifically well placed. The heavy crude refiners are still going to make more money running heavy crude than the light sweet crude, so they are going to prefer Canadian supply,” said Ms. Forrest.

While that does not mean Canadian producers should stop exploring other markets to diversify their revenue streams, Canadian crude will not disappear in the U.S. anytime soon, even without Keystone XL pipeline being built.

Over time, though, there are concerns that U.S. refiners may move toward lighter crude to meet the needs of rising U.S. shale plays, which produce lighter crude.

But is it easy for refiners to flip the switch from heavy crude to light crude?

“Probably not,” says Bill Simpkins, Atlantic Canada representative of the Canadian Fuels Association, which represents many refiners in Canada. “Mainly because once you have a refinery and it’s purpose-built for particular crude and slate of products, they are probably always sourcing that type of crude.”

And the market for heavier crude is likely to only get bigger.

“Because of the dwindling supply of conventional sweeter crudes, and their higher costs, you are more likely to see older refineries to … move into producing heavier crudes,” said Mr. Simpkins.

Gulf Coast refiners such as Marathon Petroleum Corp. and Valero Energy Corp. are strong advocates of Keystone XL and are keen to get Canadian crude to the Gulf market.

Market dynamics suggest Canadian dominance of U.S. imports can only be challenged by one formidable challenger: Saudi Arabia.

“Saudi Arabia has managed to defend its market share in the U.S. crude oil market despite the flood of heavy pipeline imports from Canada,” said Ms. Schels, primarily because Saudi medium and heavy blend is another Gulf Coast favourite.

Analysts expect discounted Canadian crude and internationally priced Saudi oil to be the last blends standing as U.S. crude imports dwindle.

Saudi Aramco, the world’s largest oil producer, and Royal Dutch Shell PLC are partners in Motiva Enterprises LLC, which has three refineries on the Gulf Coast. Motiva has a 325,000-barrel-a-day crude unit at its Port Arthur plant, a key component of the $10-billion expansion that doubled the plant’s daily capacity to 600,000 barrels, and can process heavier crudes from South America, Latin America and Saudi Arabia, apart from ligher blends.

The Saudi supply is also well suited for some of the Gulf Coast refiners, as long as its priced competitively, they will choose that, so they can make more money,” said Ms. Forrest. “That’s really what drives the economics of a particular refinery.”

Despite all the grandstanding by U.S. politicians, it is refiners’ blend preferences that are driving U.S. imports, not any great desire to displace OPEC oil.

Luckily for Canada, the heavy crude suits the large Gulf refiners.

“We are blessed,” says Mr. Simpkins. If only the price was right.