Stiff U.S. competition, an inter-province pipeline row prolongs limited export opportunity, and U.S. is its only big export customer
With U.S. shale on a tear, imports are dropping
Total U.S. crude production reached 10 MMBOPD in November 2017 and the Canadian Industrial Outlook report from The Conference Board of Canada estimates that U.S. production will pass 11 MMBOPD in 2019, putting Russia and Saudi Arabia in the rearview mirror.
This means that Canadian E&Ps will have to compete with the U.S. for investors and pipeline takeaway as production from the Permian, STACK/SCOOP, Eagle Ford and other big U.S. shale plays continue its growth spurt.
The U.S. is the number one buyer of Canada’s energy products. Largely from oil sands heavy oil production sent to Gulf coast refineries.
U.S. is prime customer for Canada’s heavy oil: IHS
A new report out this week from HIS Markit said that one third of the U.S. Gulf coast heavy oil market could be supplied by Canada by 2020.
As supplies from Mexico, Venezuela and other competitors wane, Canadian supply is increasing its share of refining runs in the world’s largest heavy oil market.
Supplies of Canadian oil sands heavy crude being refined on the U.S. Gulf coast could top 1.2 million barrels per day (MMBOPD)—a full one-third of the region’s heavy oil refining market—by 2020, according to the report by IHS Markit.
Current runs of Canadian crude in the USGC market are estimated to already be in excess of 800,000 barrels per day, the report says.
Imports from Canada in the U.S. Midwest have joined renewed U.S. domestic light oil to collectively displace nearly all other imports, the report said.
The U.S. Gulf Coast is home to the world’s highest concentration of heavy oil refineries, with in excess of 90 percent of the heavy oil supplied to them from imports.
But supplies from some traditional sources of these imports are waning. Over the past five years, production from Mexico and Venezuela—two key oil sands competitors—has declined by nearly 1 MMBOPD.
IHS Markit believes that Canadian heavy oil imports may be simply “stopping off” at Cushing, Oklahoma, in the U.S. Midwest—where they have already exceeded demand in that market—before being rerouted to the Gulf coast. Due to the way imports are often tracked, these imports would be counted as having been delivered into Cushing rather than to their final destination.
“The U.S. Gulf Coast is the most logistically approximate and technically suited to receive increasing volumes of heavy oil from Canada,” said Kevin Birn, executive director – IHS Markit, who heads the Oil Sands Dialogue. While the United States provides security of demand for Canada, there are risks to overreliance, the report points out.
The IHS Markit forecast assumes the completion of all the country’s remaining long-distance export pipelines. If those projects were delayed or Canadian or other heavy oil supply is more prolific than anticipated, Canada may have to compete more aggressively for market share in the United States—something it has not yet had to do.
“Although Canadian imports are of similar quality as Latin American crudes, they are not identical. There is a point when more extensive modifications will be required to better tailor facilities to accommodate greater volumes of the Canadian heavy crude,” said Birn. “In a situation where the level of competition is high, Canadian crude may have to adjust price to incentivize refiners to make additional modifications and/or displace greater quantities of offshore imports.”
Alternative diversification strategies—such as customizing oil sands blends or developing upstream partial processing technologies that would result in the marketing of a greater range of crude oil qualities—can help mitigate the risks.
“These solutions would not remove the risk and would still take considerable investment and time,” the report said.
“The reality is that Canada—the 5th largest oil producer in the world—maintains an almost singular reliance on one market,” Birn said. “Such a situation is unique in the world and will always carry associated concerns.”
“New pipelines that provide access to tidewater will be crucial for Canada to develop new export markets given that Canada’s biggest export market for oil, the United States, is ramping up its own production,” said Michael Burt, director of industrial economic trends at The Conference Board of Canada.
Pipeline capacity in Western Canada simply can’t keep up with production. According to Bloomberg, Western Canadian crude production will exceed the pipeline capacity to carry it away by 338 MBOPD by the end of 2018.
The EIA estimated that Canada produced 4.9 MMBOPD in 2017. But due to the backed-up railways, export-by-rail has resulted in higher costs and reduced profits for Canadian E&Ps. At the time of this article, Western Canadian Select (WCS) was around $50/bbl, while WTI was around $65/bbl.
Differential is costing Canadian producers $10 billion a year: Scotiabank
Scotiabank estimates that the forgone profits due to the price differential between Canadian and U.S. oil will cost Canada more than $10 billion this year, or 0.5% of GDP.
The B.C.-Alberta pipeline dispute
More U.S. domestic production and less dependence on imports will amplify the economic effects of Canada’s B.C.-Alberta dispute. Yesterday, The Globe and Mail reported that Alberta Premier Rachel Notley went so far as to offer up buying the Trans Mountain pipeline from Kinder Morgan, using taxpayer money to ensure that Canadian energy products reach oversea markets in Asia.
But British Columbia, which has strongly opposed to fossil fuel projects, didn’t flinch. “Certainly the Premier of Alberta is entitled to do whatever she wants within her borders. If she wants to invest in a pipeline, that’s her business,” B.C. Premier Horgan told the media.
Don’t count Canada out just yet
The Canadian Industrial Outlook forecasts that Canada’s oil industry will return to profitability in 2018. The report said companies have become more efficient – output per worker has increased by 15.4% over the last five-years. Canada’s oil industry will have to increase productivity even more to remain competitive. For example, current U.S. rigs are nearly 3.1 times more productive than January 2014 rigs.
According to the Canadian Industrial Outlook, total crude production in Canada is forecasted to rise by an average annual rate of 3.4% between 2018 and 2022 and the vast majority of that increase will come from oil sands, while offshore production and diluent production will make up the remainder.
With prices and production both on the rise, industry revenues are forecasted to increase by about 8% in 2018, the Outlook said. However, employment gains will be modest due to efficiency gains and cost-containment – the Canadian oil industry is expected to create 2,150 new jobs over the next five-years.
Industry pre-tax profits are expected to reach $1.4 billion this year, the Outlook reported.
What about Canada’s existing pipelines, expansions and newbuilds?
Enbridge’s Line 3 Replacement Project will come online in 2019 – currently it is conditionally approved by Canada’s federal government, and it should add about 0.37 MMBOPD takeaway capacity. According to Enbridge, the Line 3 Replacement is a multi-billion dollar private investment consisting of 1,031 miles of 36-inch diameter pipeline beginning in Hardisty, Alberta and ending in Superior, Wisconsin.
The disputed Trans Mountain Expansion (TME), also conditionally approved by Canada’s federal government, will need Prime Minister Justin Trudeau’s constitutional powers to snap British Columbia’s political opposition to the project. If approved, the TME will add another 0.59 MMBOPD starting in 2021, along with the Keystone XL’s 0.83 MMBOPD. Assuming the Keystone XL receives final approvals of its amended route in Nebraska.
One Third of the U.S. Gulf Coast Heavy Oil Market Could be Supplied by Canada by 2020, IHS Markit Report Says
As supplies from Mexico, Venezuela and other competitors wane, Canadian supply is increasing its share of refining runs in the world’s largest heavy oil market
Supplies of Canadian oil sands heavy crude are increasingly being refined on the U.S. Gulf Coast (USGC) and could top 1.2 million barrels per day (mbd)—a full one-third of the region’s heavy oil refining market—by 2020, says a new report by business information provider IHS Markit (ticker: INFO).
Current runs of Canadian crude in the USGC market are estimated to already be in excess of 800,000 barrels per day (bpd), the report says.
Entitled Looking South: A Canadian Perspective on the U.S. Gulf Coast Heavy Oil Market, the Oil Sands Dialogue report says that the increasing volumes into the USGC refining market is coming at an opportune time for both nations. Imports from Canada have exceeded demand in their traditional import market—the U.S. Midwest—where they have joined renewed U.S. domestic light oil to collectively displace nearly all other imports.
The U.S. Gulf Coast is home to the world’s highest concentration of heavy oil refineries and more than 90 percent of the heavy oil supplied to them comes from imports. But supplies from some traditional sources of these imports are waning. Over the past five years, production from Mexico and Venezuela—two key oil sands competitors—has declined by nearly 1 mbd. This is increasing the need for Canadian heavy crude oil of similar quality, the report says.
The 800,000 bpd estimate for current runs of Canadian crude in the USGC is already significantly higher than many other estimates. IHS Markit believes that Canadian heavy oil imports may be simply “stopping off” at Cushing, OK in the U.S. Midwest—where they have already exceeded demand in that market—before being rerouted to the Gulf coast. Due to the way imports are often tracked, these imports would be counted as having been delivered into Cushing rather than to their final destination.
“The U.S. Gulf Coast is the most logistically approximate and technically suited to receive increasing volumes of heavy oil from Canada,” said Kevin Birn, executive director – IHS Markit, who heads the Oil Sands Dialogue. “With supply overtaking demand in the U.S. Midwest and traditional sources of offshore heavy supply to the Gulf Coast in decline, Canadian supply has become an obvious and attractive alternative.”
Increased volume in the USGC market would raise Canada’s already sizeable reliance on the U.S. oil market, however. And while the United States provides security of demand for Canada, there are risks to overreliance, the report says.
The IHS Markit forecast assumes the completion of all the country’s remaining long-distance export pipelines. If those projects were delayed or Canadian or other heavy oil supply is more prolific than anticipated, Canada may have to compete more aggressively for market share in the United States—something it has not yet had to do.
“Although Canadian imports are of similar quality as Latin American crudes, they are not identical. There is a point when more extensive modifications will be required to better tailor facilities to accommodate greater volumes of the Canadian heavy crude,” said Birn. “In a situation where the level of competition is high, Canadian crude may have to adjust price to incentivize refiners to make additional modifications and/or displace greater quantities of offshore imports.”
Alternative diversification strategies—such as customizing oil sands blends or developing upstream partial processing technologies that would result in the marketing of a greater range of crude oil qualities—can help mitigate the risks. However, given the scale of Canadian heavy oil supply today and anticipated growth, these solutions would not remove the risk and would still take considerable investment and time, the report concludes.
“The reality is that Canada—the 5th largest oil producer in the world—maintains an almost singular reliance on one market,” Birn said. “Such a situation is unique in the world and will always carry associated concerns.”
