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Cross-border flow in full swing US, Canada set new records in two-way crude shipments, with US expected to make even larger strides with removal of export ban GARY PARK For Petroleum News
Cross-border flows saw exports of United States crude oil to Canada hit a record level in 2015, but the volumes were only a fraction of the record south-bound shipments from Canada.
However, the gap is expected to narrow dramatically this year as the right to export from the United States gathers momentum.
With the volumes shipped out of the U.S. being rapidly ramped up since the Obama administration lifted a 40-year ban on exports, an average 422,000 barrels per day flowed into Canada, representing 92 percent of all the crude which left the U.S.
But even more startling, based on figures released from the U.S. Energy Information Administration, was the record 3.18 million bpd delivered to the Lower 48 from Canada, accounting for 43 percent of oil imported by the United States and an increase of 10 percent from 2014.
Those bottom-line numbers defied the common wisdom that the U.S. was taking a drastically reduced quantity from Canada after its domestic production quadrupled over the past five years.
Canadian crude discounted The EIA report referred to Canada’s limited bargaining leverage when it comes to pricing its crude on export markets.
Crude leaving Canada is already discounted compared with the West Texas Intermediate benchmark price because of its heavy crude component and long distances from key refineries in Texas.
The EIA noted that Canada has few alternative “outlets” for its heavy crude from the oil sands.
“A lot of the discount for Western Canada Select (a blending of heavy crude) pricing has to do with Canada’s limited transportation options,” said Hannah Breul, a petroleum markets analyst with the EIA.
“Because it’s relatively landlocked crude, it’s dependent on pipeline takeaway capacity, augmented by rail, which makes the U.S. market the natural destination, at this point.”
The EIA said Canada generally produces heavy, sour crude that is well-matched to processing facilities in Texas and the U.S. Midwest, where refineries have been adapted to handle heavy crudes from Venezuela and Mexico.
The agency said Canada is expected to continue supplying a large share of U.S. imports “for the foreseeable future, especially given the expansion of pipeline and rail shipping capacities to transport Canadian oil.”
Canada, along with Saudi Arabia (14 percent), Venezuela (11 percent) and Mexico (9 percent) - leaving the rest of the world at a combined 23 percent - are now the largest external crude suppliers to the U.S.
Domestically, U.S. crude production averaged 9.43 million bpd in 2015, up 722,000 bpd from 2014, following a gain of 1.24 million bpd in 2014.
Texas averaged 3.46 million bpd, an increase of 290,000 bpd from 2014, with North Dakota slipping 30,000 bpd to 1.14 million bpd, while offshore Gulf of Mexico edged up 110,000 bpd to 1.63 million bpd.
Light, sweet crude displaced Judith Dwarkin, chief economist at RS Energy Group in Calgary, said rising volumes of light, sweet crude from the U.S. shale regions have displaced light, sweet volumes imported from OPEC, with shipments showing a steady decline from about 10 million bpd in the 2005-2008 period and are now at their lowest level in about 20 years, although still a far cry from about 2.5 million bpd in 1985.
She said the U.S. Midwest remains the largest and most “natural” market for Canadian crude because of its proximity to Canada’s largest oil resources and because refineries are set up to extract the best value for processed heavy crude which has been “priced right to beat off any potential competitors.”
Given that the first U.S. exports since the 1970s only started last December, volumes flowing into Eastern Canadian refinery hubs could face a dramatic change this year.
Canada’s National Energy Board said refineries in Quebec and New Brunswick are already being swamped with foreign crude, pending any resolution of the disputes that have tied up TransCanada’s plans for its 1.1 million bpd Energy East pipeline from Alberta and Saskatchewan to Quebec and Atlantic Canada.
Canadian imports up 16 percent The NEB said crude imports into Canada jumped by 16 percent in 2015 to 736,000 bpd, with increased supplies from Saudi Arabia trailing only the emergence of U.S. crude, which climbed to 422,000 bpd from less than 100,000 bpd only five years ago.
Saudi volumes now comprise 11.4 percent of the total, while Nigeria tripled to 5.2 percent, a further reflection of the dramatic upheaval in global markets over the past two years. The leading other sources are Algeria, Angola and Norway.
Canada’s major eastern refineries - Suncor Energy and Valero Energy in Quebec and Irving Oil in New Brunswick - are relishing their access to a broader range of supply options, including a steady diet of cheap U.S. crude, a trend analysts expect would continue even if Energy East gets a green light.
Martin King, an analyst at FirstEnergy Capital, said the refineries will always take the “cheapest barrels,” no matter where they come from.
That’s a sharp turnaround from the traditional pattern of those refineries relying heavily on North American crude by investing heavily on rail, whose role has been undermined by the reversal of Enbridge’s Line 9 in December to carry 240,000 bpd from Western Canada.
Jason Parent, a consultant with the Ontario-based Kent Group, said the sudden abundance of light crude in the U.S. suits the configuration of Eastern Canada refineries.
He said those facilities will take the feedstock that “makes sense to them ... if that’s available on Energy East they will take advantage of that. If not, it’s an avenue for Canadian producers to get their product to export markets.”
Refinery analysts said Irving’s 300,000 bpd plant takes only “occasional” batches of synthetic crude from Alberta, while Valero relies on its flexibility to buy the “most economical” supplies.
Irving President Ian Whitcomb told the Financial Post that the Canadian capital his company is spending to buy oil outside Canada “should stay inside.”
But he also cautioned that even if Energy East is built, Irving will remain open to buying foreign oil to protect its range of diverse suppliers, noting that shipments from Saudi Arabia are compelling because of low transportation costs.
“We will add Western Canadian crude to our portfolio as the economics dictate, but probably not at the expense of our Saudi barrels,” Whitcomb said.
TransCanada, in defense of Energy East, has referred to NEB estimates that Canada spends about C$26 billion a year importing crude, of which it said that only C$8 billion would be needed to cover the average annual payroll for 15,000 teachers over nine years.
Gary Houston, TransCanada’s president for Ontario and the Prairies, said the company is only weeks away from finalizing a permit application, which it expects will see a permit issued by late 2018.
He said TransCanada’s efforts on the project will ensure that oil is safely delivered from producers to refineries in Canada, ending the use of hazardous rail transportation, while generating billions of dollars in jobs and revenues.
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