Global oil supply and demand has been turned on its head in the past five years, with North America — powered by the Bakken, Eagle Ford and Permian plays — now the fastest-growing source of crude outside OPEC, setting the stage for a pivotal debate in the next session of the U.S. Congress over whether or where to draw the line on exports.
The shifting of market forces is captured in the latest medium-term outlook by the International Energy Agency, which forecasts that U.S. production will rise by 3.3 million barrels per day over the next five years to 11.4 million bpd, surpassing current output in Saudi Arabia.
The IEA also predicts Canadian output will grow by 1.1 million bpd, primarily from the oil sands, up about one-third from last year’s volumes.
The challenge for Canadian producers, the IEA warns, is that surging U.S. production in a drowsy U.S. market is filling up available North American pipeline capacity as bottlenecks “dent Canadian unconventional growth.”
The picture helps explain the frantic efforts of the Canadian government, led by trade missions across the Pacific by Prime Minister Stephen Harper and key cabinet ministers, to open up exports to China, India and other Asian markets.
Natural Resources Minister Joe Oliver was in India in the first week of October to pitch greater exports of Canadian crude and LNG to the subcontinent and make his case for more Asian investment in the oil sands.
Rethinking ban on exports
While the Harper government is figuring out how best to answer the upheaval taking place in the energy sector, the U.S. is grappling with what would have been an unforeseen challenge only a couple of years ago.
As North Dakota production — 90 percent of it from the Bakken — tops 700,000 bpd for the first time and the Texas fields set a robust pace, the pressure builds on U.S. lawmakers to rethink the ban on crude shipments to other countries, especially as surplus light oil volumes collide with U.S. refineries that have been adapted to run heavier crudes.
Shell, BP and Statoil have either obtained or applied for U.S. government permission to deliver crude to refineries in Eastern Canada that welcome the chance to shed their reliance on Brent-priced crudes from West Africa, Venezuela and the North Sea.
Although shipments from the U.S. have been taking place almost unnoticed for years, they are suddenly facing a close political examination as stranded Bakken production seeks new markets, although the Commerce Department is forbidden to release the terms of export licenses, even after they have been issued.
Easing into debate
Guy Caruso, the U.S. Energy Information Administration administrator from 2002 to 2008, told Platts the exports to Eastern Canada may be a “way of easing into the debate that we’re presumably going to have when and if new unconventional oil really starts ramping up and we’re in a whole new world.”
He said it makes sense to allow increased shipments to Canada, despite the accompanying political tussle, to allow the provision of infrastructure to match the production technology and investment in the mid-U.S.
But Caruso conceded that the issue must overcome a major obstacle at a time when the public is being told the U.S. faces energy scarcity and must put all of its emphasis on independence.
Adam Sieminski, the current EIA administrator, suggested in June that Washington might reconsider its ban on sending crude overseas as production from tight plays creates regional surpluses.
“If the occasion came up where some of the oil we had was more useful for refining or export, I’m not sure that we should just automatically assume that this would be bad,” he said. “It might actually be a way to grow the economy, create jobs and ultimately help reduce prices for oil and oil products.”
Could be issue next year
Citibank analyst Ed Morse said the surplus crude flowing from Eagle Ford, Permian and Bakken could force lawmakers to face the issue as early as 2013 or 2014, coinciding with the debate over whether the U.S. should allow LNG exports.
U.S. Rep Ed Markey, D-Mass., is in the forefront of those ready to do battle with any moves to ease the crude export ban.
He introduced legislation in February mandating that any crude carried on TransCanada’s Keystone XL pipeline as well as any products refined from that crude must be sold in the U.S.
Markey said other countries should not be allowed to “dissect our country with a pipeline then bypass our citizens by sneaking that oil out of the U.S.”
Lucian Pugliaresi, president of the Energy Policy Research Foundation in Washington, D.C., said he believes the Commerce Department works on the assumption that crude oil shipped to Canada, returns as refined products, thus “it equals out, more or less.”
Currently, producers must get individual waivers from the Commerce Department Bureau of Industry and Security to engage in crude exports — approval that has presumed over the past 27 years if the exports are destined for Canada.
The EIA has estimated that 65 percent of the 255 million barrels of U.S. crude cleared for export over the past 15 years has, in fact, headed to Canada.
On an annual basis, U.S. crude exports to Canada peaked at 20.8 million barrels in 1998, slumped to 3.2 million barrels in 2002, then rose again to 16.8 million barrels in 2011.
Geared to lighter crudes
Refineries in Newfoundland and New Brunswick are generally geared to run lighter crudes, which makes the Bakken Blend crude, with an API gravity of 38-40 degrees, especially appealing.
Peter Boag, president of the Canadian Fuels Association, said those refineries are eager to gain access to U.S. crude because of the West Texas Intermediate-Brent price differential, although he was unable to estimate how much Bakken crude has entered the mix so far.
However, Statoil has confirmed it is shipping some of its Bakken Blend to Irving Oil’s 300,000 bpd refinery — the largest in Canada — at Saint John, New Brunswick. Neither Statoil nor Irving would put a number on the volumes.
Imperial Oil confirmed in a May conference call it has been shipping Bakken Blend by rail to its two Ontario refineries, saying it is taking as much as it can handle, but Valero said it is not processing Bakken crude at its Quebec City refinery.
BP has obtained U.S. government approval to export U.S. crude to Canada, but has yet to use the license and Shell has applied for a license.
Competing crudes will move to the East Coast now that Enbridge has approval from Canada’s National Energy Board to reverse a segment of its 240,000 bpd Line 9 in Ontario to a west-to-east flow.
That reversal, part of Enbridge’s planned Eastern Access program, is designed to handle rising production from the Alberta oil sands and the Bakken.
