Canada’s crude cocktail

Oil blending aimed at displacing foreign sources in U.S. Midwest

Gary Park

Petroleum News Calgary Correspondent

Canadian crude producers plan to offer a 50-50 blend of synthetic oil and bitumen in a bid to displace foreign competitors from the U.S. Midwest.

Having already displaced foreign sources from Midwest plants that specialize in refining heavy crude, the Canadian crude producers are testing the so-called “blended cocktail” of synthetic and crude as they take aim at wresting control of the market for “medium sour” crude.

The objective is to persuade the refineries to buy from Canada rather than their traditional sources in Saudi Arabia, Mexico and Venezuela.

Currently about one-third of the 1 million barrels per day of medium sour crude arriving at Midwest refineries comes from OPEC countries.

Because Canada offers a substantial edge in transportation costs, “we believe the U.S. refineries will have a preference to buy Canadian crude rather than foreign oil,” said Canadian Natural Resources Senior Marketing Vice President Real Cusson.

“It’s pure marketing. You price the product right and the refiner will select you over an international barrel,” he predicted.

“We have to move our oil to existing refineries and we will do so by giving them feedstock that they can process without costly upgrading of their refineries and priced appropriately so they are left indifferent.

“The U.S. refiner will not pay a premium to upgrade Canadian crude, but as long as he gets the same value out of a barrel of oil as he does from a foreign barrel, then we believe that they will have a preference for the more reliable Canadian barrel, because the supply route is a whole lot shorter,” he said.

New blend called Synbit

The “cocktail” would be mixed at oil terminal facilities at Edmonton and Hardisty in Alberta rather than the current practice of shipping thick bitumen by adding condensate, which is expensive and facing a supply squeeze.

“You take two products (synthetic crude and bitumen) that left on their own would have to take a very serious discount in the market place and you put them together and then you are replicating pretty close to what a medium sour barrel looks like and so we have in that manner found a way to add incremental market and add value,” Cusson said.

He noted that a similar strategy was used to push heavy crudes from Mexico and Venezuela out of the Midwest refining region.

Canadian Natural President John Langille said the end result requires a total industry effort because “the essence of it is taking away some markets from other types of oil that are currently going to the U.S. Eventually we will because I believe the U.S. has a vested interest in trying to get more oil from Canada.”

As well, talks are taking place between Canadian oil companies and ExxonMobil about the chances of reversing the U.S. Gulf Coast-to-Illinois pipeline to give Canadian crudes greater access to the refinery region.

The idea surfaced amid a quickening pace of oil sands development, including a recent breakthrough that has seen ConocoPhillips and Devon Energy emerge as the first U.S.-based operators of projects.

Canadian Natural is also on the verge of a go-ahead decision on its staged C$8.4 billion Horizon project, designed to start at 110,000 barrels per day of upgraded product in 2008 and expand to 232,000 bpd by 2012.

If all current proposals go ahead and are completed on time, oil sands output will climb by 45 percent to 1 million bpd by 2010, which increases the pressure to find outlets or risk a supply glut on the Canadian market.