Analyst: Pipeline Projects Key for Canada to Win N. America Oil Export Race
Sharing a border that spans more than 5,000 miles, the United States and Canada are longstanding allies that maintain numerous cultural and economic ties. Even friends, however, can compete against each other from time to time – consider the two countries' famous rivalry in the sport of ice hockey.
Within the energy sphere, Canada and its southern neighbor are engaged in a different type of competition: the race to gain first-mover advantage for exporting crude oil to markets throughout the Atlantic and Pacific basins. According to the U.K.-based research and consulting firm GlobalData, Canada is outperforming the United States in this rivalry by advancing three critical pipeline projects.
- TransCanada's Energy East Pipeline, which would carry 1.1 million barrels per day (bpd) of crude from Alberta and Saskatchewan to refineries and terminals in Eastern Canada
- Enbridge's Northern Gateway Pipeline, a twin pipeline that would carry up to 525,000 bpd of crude oil westbound from Northern Alberta to the Pacific port of Kitimat, British Columbia, and 193,000 bpd of condensate on the eastbound leg
- Kinder Morgan's Trans Mountain Expansion Project, which would twin an existing pipeline from the Edmonton, Alberta, area westward to Burnaby, B.C., to boost its capacity from 300,000 to 890,000 bpd.
A U.S. law enacted in 1975 in response to the oil crisis earlier that decade – the Energy Policy and Conservation Act (EPCA) - largely prohibits crude oil exports from that country. Given the dramatic changes in the U.S. oil supply situation as a result of new domestic production from prolific shale plays such as the Eagle Ford and Bakken, producers, refiners, policymakers and others have been engaging in a debate over whether to ease export restrictions.
"With a stroke of a pen, the Obama administration could ease and/or eliminate the ban on crude exports from the U.S.," noted Carmine Rositano, GlobalData's managing analyst covering downstream oil and gas. "The law was enacted…in a different era and is not representative of today's energy environment."
The highly fractious political environment in Washington, D.C., coupled with the disagreement on lifting the ban within the domestic oil and gas industry itself (producers largely favor the idea while some refiners oppose it), diminish the chances for a quick resolution on the issue. The proposed infrastructure projects north of the border, however, may give Canada the edge in shaping the North American oil export scene, Rositano said:
DownstreamToday caught up with Rositano to discuss the crude oil export race underway in North America. Read on for his insights.
DownstreamToday: What do you see as the key manifestations of the United States’ procrastination that is costing it first-mover advantage for North American crude exports?
Carmine Rositano: There is currently a law prohibiting crude oil exports from the U.S, enacted in the 1970s. Until recently, the U.S. was the world’s largest importer of crude oil, but higher domestic crude oil production from hydraulic fracturing has reduced imports. There is no uniform view within the oil industry concerning crude oil exports. Refiners in the U.S. oppose exporting crude oil while producers favor it. Each is lobbying Congress to promote their view as the best approach for the country. Public perception is also a concern, as exporting crude oil could increase gasoline and consumer prices. There are also environmental concerns, as more fracking will increase crude oil production volumes in the U.S.
DownstreamToday: In terms of potential crude export volumes, how do Canada and the United States compare?
Rositano: Higher crude oil production levels in Canada are clearly surplus to their internal requirements. It is forecast that Canadian oil production could increase by over 3 million bpd within the next decade. This increase would be used to reduce crude oil imports to their East-Coast refineries. The remaining volumes, forecast at over 2 million bpd, would then be available for export.
The situation in the U.S. is not as clear-cut as in Canada. While U.S. production will increase, it will remain below oil demand levels and U.S. refining capacity levels.
It should be noted that the U.S. has emerged as a major product-exporting country, with exports reaching 3 million bpd in 2013. U.S. refiners have a feedstock and fuel-cost advantage over international competitors as land-locked North American crude oil sells at a discount to international crude oil, while lower-cost natural gas provides a fuel-cost advantage. The question for exports from the U.S. could become whether it is more advantageous for the country to export crude oil or product, or to arrive at a consensus as to the optimal mix of crude oil and refined-product export levels.
DownstreamToday: Which particular markets is Canada best positioned to serve, and is it in a better position than the U.S. in any cases?
Rositano: Canada is best positioned to export crude oil into the Pacific Basin area, as the increase in oil demand and refining capacity combined with stagnant crude oil production in Asia will necessitate incremental crude oil imports. Additionally, the construction of deepwater ports on Canada’s west coast will allow larger tankers (very large crude carriers [VLCCs]/Suezmax) to transport crude oil to Asia in a cost-effective manner.
Europe could emerge as a key destination for exports from both Canada and the U.S., as there is infrastructure in the U.S. Gulf Coast to export crude oil from this area to Europe. There is a provision that allows Canadian crude oil moved into the U.S. to be re-exported through U.S. ports, and Repsol has recently purchased Canadian crude oil for export from Freeport, Texas, to refineries in Spain. While Canada is permitted to re-export oil from the U.S., exporting U.S. crudes to Europe remains banned.
DownstreamToday: Where do Energy East, Northern Gateway, and the Trans Mountain Expansion stand in terms of gaining regulatory approvals and project development? Do you see any significant hurdles for these projects from regulators, non-governmental organizations and others?
Rositano: The Northern Gateway Project’s Joint Review Panel recently concluded that Canada and Canadians are better off with the project than without it. The Governor-in-Council must now decide, within 180 days, whether to accept, reject or request a reconsideration of the panel’s recommendation. However, local Aboriginal groups could reject the recommendation and a legal challenge could go all the way to the Supreme Court.
The Trans Mountain is now conducting field studies along the proposed pipeline route from Edmonton to Burnaby, comprising workshops and open houses in communities. First Nations groups and businesses will participate in the field studies to assist with data collection and to ensure that their concerns are heard and considered.
The National Energy Board approved the Line 9B reversal and Line 9 capacity expansion project in the Eastern Access Initiative in March 2014. All regulatory applications will be filed in 2014 and final approval is expected in Q4 2015.
DownstreamToday: What will these projects mean for Canada’s economy, particularly in terms of job creation, growth for related industries, etc.?
Rositano: Canada has the third-largest oil reserve position in the world, and the increase in production is surplus to its internal requirements. Exports to the U.S. have just about reached their maximum level as U.S. domestic production continues to increase. It is unclear why any country would choose not to develop and export its resources and instead let them sit in the ground.
We are talking about the ability to export at least 2 million bpd – assume US$100 per barrel world crude oil price and one gets a magnitude of the revenues at stake. We are talking about billions of dollars in tax revenue and the ability to develop multiple oil sand projects in Alberta, requiring manpower and capital, such as pipes, services, housing and food.
DownstreamToday: How would you characterize the cost to the US economy in terms of losing first-mover advantage for North American crude oil exports?
Rositano: The U.S. recently approved the export of liquefied natural gas (LNG) from facilities to be built in the Gulf, East and West Coast areas. Customers in Europe and Asia have already committed to taking LNG volumes from facilities to be built. The economy suffers when the optimal use of resources is not permitted. Refiners in the U.S. have been able to process increasing volumes of oil shale crudes from Eagle Ford and Bakken. However, the ability to process ever-increasing volumes of these crudes is reaching its zenith. Product exports from the U.S. will now be competing with new export-oriented refining capacity in the Middle East and Asia and new capacity in Latin America that could cap product import levels in this area. The option to export crude oil and adjust to a rapidly changing U.S. energy landscape is key to optimizing activity in an economy still struggling to recoup job losses from the last recession.
DownstreamToday: Would you like to add any comments?
Rositano: There have been recent discussions with the Obama administration and oil shale producers concerning the possibility of allowing super-light condensate exports. Some refiners have admitted that there is an excess of this super-light oil that has resulted in operational challenges at their refineries and have caused them to reduce runs. Exporting super-light condensate would be an excellent first step on which the U.S. could take the lead in terms of crude oil exports.
Matthew V. Veazey has written about the upstream and downstream O&G sectors for more than a decade. Email Matthew at email@example.com. Twitter: @Matthew_Veazey