A $7.4 billion expansion of the Trans Mountain pipeline makes no economic sense, if the idea is to open Alberta heavy crude to Asian markets.
That’s the argument that has been made by some of the expansion project’s critics.
They note that almost all of the oil that has moved by tanker out of Westridge Marine Terminal in Burnaby has, to date, been destined for the U.S., not Asia.
If there were a market for Alberta oil in China, why hasn’t Alberta oil been moving by tanker via Vancouver all along?
However, those critics may have a hard time fitting recent tanker shipments to China and South Korea into the narrative that no one in Asia wants Alberta’s dirty oil.
On October 15, the Nordtulip, a Portuguese crude oil tanker, left Vancouver destined for Rizhao, China, according to marinetraffic.com.
And according to S&P Global Platts, at least three more shipments of Alberta crude have been booked by Chinese buyers for the fourth quarter of 2018.
Earlier this year, EnergiNews also reported that the Serene Sea, carrying about 514,000 barrels of crude, left the Westridge Marine Terminal on July 4 destined for Guangdong, China.
South Korean refineries have also taken at least two shipments of Alberta crude this year – a total of 591,000 barrels – according to Platts.
Between January and August, 873,473 barrels of heavy crude from Alberta were shipped to China via Vancouver, according to Statistics Canada. The value of those exports was $44 million – $51 per barrel. Twice that amount – $91 million – of heavy crude shipped to China via Newfoundland.
Kevin Birn, director of North American crude markets for IHS Markit, said the recent sales confirm a market for Alberta crude exists in Asia.
Darryl Anderson, managing director and multi-modal logistics expert at Wave Point Consulting, said Alberta oil has also been making its way to Asia via the U.S. Some oil has moved by rail through Oregon, and some has shipped through the U.S. Gulf Coast.
“There’s Canadian oil, over the last couple of years, that has flowed through the pipeline and was exported through U.S. Gulf ports, and some of that [went] to Asia,” Anderson said. “You’re going to tell me there’s no market?”
Platts notes that it is unusual for Asian buyers to be booking so many shipments of Canadian heavy crude.
“Purchases of Canadian crude had been extremely rare by Asian refiners before 2018,” Platts states in its report.
It cites an uncertain supply of heavy crude from Venezuela and falling production in Australia for the sudden increase. U.S. President Donald Trump’s trade war with China could also result in increased demand for Canadian oil in China, which recently stopped buying American oil.
The biggest factor in shifting demand for heavy oil is Venezuela. It may sit on the world’s largest oil reserves, but the country’s economic crisis has spurred an exodus of skilled workers and repelled the capital needed to keep up infrastructure and production.
As a result, Venezuela, like Canada, has an abundance of oil it can’t sell, but for different reasons.
Canada’s problem is simply a lack of pipeline and rail capacity – something Alberta Premier Rachel Notley last week said she planned to lobby Ottawa to address. Notley wants the federal government to step in and help out with the rail capacity needed to provide a temporary outlet for Alberta oil, until new pipelines can be built.
Three are at various stages of shovel-readiness – Line 3, Keystone XL and the Trans Mountain pipeline expansion. But all have encountered regulatory delays.
Opportunity knocks
Because it has high sulphur content, Alberta crude is not suitable for some refiners. It’s not an issue for the Chinese buyers, however, Platts notes. Some of the Alberta crude China has purchased appears to be intended mostly for making asphalt.
A lack of both pipeline and rail capacity has led to a recent record discount of about US$50 per barrel for Alberta oil, compared with American oil. About US$15 to US$20 of that discount can be attributed to the lesser value that is placed on heavier crudes like Alberta’s, compared with other oils, because an extra step is needed to refine it, making it costlier to refine. But about US$30 of the current discount is attributable to a lack of pipeline and rail capacity. That steep discount may now be improving the economics of Alberta oil for Asian buyers.
“Arbitrage economics to import Alberta’s landlocked oil had often been difficult due to hefty transportation and logistics costs,” Platts notes. “Asian trade sources also noted that Vancouver was an expensive port to export oil from due to strict environmental regulations for tankers.
“However, with cash differentials for heavy sour Canadian grades including Cold Lake Blend and WCS [Western Canadian Select] consistently remaining at steep discounts this year, various Northeast Asian end-users have stepped up their heavy Canadian crude imports.”
But even if China’s demand for Alberta oil continues to rise, there’s limited pipeline and rail capacity to get it there.
The current Trans Mountain pipeline is stretched to capacity. Recently, only about 25,000 barrels per day (bpd) of heavy crude from Alberta have flowed on it, although in April it hit 88,000 bpd, according to the National Energy Board.
An Aframax tanker, which can hold up to 750,000 barrels, would take several days to fill with those kinds of flows.
“We’ve always thought the biggest limitation to exports to Asia was adequate, efficient pipeline capacity to the west coast, not that there wasn’t a market,” Birn said. “Asia as a whole is the second largest for heavy crude oil in the world.”
The largest is the U.S., and there, as well, there may be an increasing demand for Canadian heavy oil, despite the shale oil boom in the country.
Refineries on the U.S. Gulf Coast are configured to process heavy crude oil, with Canada, Mexico and Venezuela being some of the biggest suppliers. But Venezuela is on the verge of economic collapse, threatening its ability to continue to process and sell its oil.
Oil production in Mexico, meanwhile, has been falling for years, and now the new president, Andrés Manuel López Obrador, plans to restrict oil exports and keep Mexican oil for domestic refining purposes.
Meanwhile, U.S. sanctions on Iran mean an even tighter supply of heavy crude oil worldwide.
It all adds up to a potentially increasing demand for Canadian heavy oil in both Asia and the U.S.
“Venezuela is losing production – one of the fastest declines in the world – Iranian production is being tightened off by U.S. sanctions, Mexico is in a long-term decline, and then you have [López Obrador] talking down those exports as well,” Birn said.
“So you could see, if I’m a refinery that has heavy [refining capacity], whether I’m in Asia or in the Gulf Coast, why I might want to look around to try to lock into something else from somewhere else.
“Western Canadian production is about as stable as you get, when you look at 40-year production profiles. As a refinery, that’s the kind of production you want to lock into, because you can configure your facility to meet that production for many, many years.”
@nbennett_biv
