Canada oil dependence on US loosens in Trump era

Bloomberg

The Canadian oil patch’s half-century bond to the US market is loosening one tanker load at a time in Donald Trump’s “America First” era. Last month, a ship loaded oil off Newfoundland and set sail on a 10,000-plus nautical mile, or 18,500 kilometer, journey to China, following on the heels of an oil-sands cargo shipped from the US Gulf Coast. India-based Reliance Industries Ltd. is set to receive the first shipment of heavy Canadian crude in April, a person familiar with the orders said last month.
For a country that sent about 99 percent of its crude exports to the US last year, the recent flow to Asia is a welcome sign of diversification to many Canadian producers and political leaders. While the shipments represent baby steps in efforts to wean Canada off the almost exclusive dependence on the juggernaut to the south, they are part of a broader move that includes three major pipeline projects.
“With any kind of business, you don’t want to have just one market so I think it will continue to be important that Canada expand its access to markets wherever it can,” Al Monaco, chief executive officer of Calgary-based Enbridge Inc., North America’s biggest pipeline operator, said this week at the CERAWeek by IHS Markit conference in Houston.
BORDER TAX
The Trump administration is mulling a border tax that could raise the cost of imported oil, a prospect that’s undermining the values of Canadian energy producers versus their US counterparts. At the same time, US oil production is rising again after a year-long slump, displacing foreign oil.
The push to lessen dependence on the US comes as international oil companies reduce their exposure to Canada’s oil sands. Royal Dutch Shell Plc and Marathon Oil Corp. said they sold C$12.7 billion of operations in Northern Alberta assets after Exxon Mobil Corporation and ConocoPhillips slashed billions from their Canadian reserves.
“We want to expand our export markets,” said James Carr, Canada’s energy minister, in comments at CERAWeek on Wednesday. “Ninety-eight percent of Canadian oil and gas exports go to the United States. We love you! But we want to love others, too.”
Canada, holder of the world’s third-largest crude reserves, sent 3.4 million barrels a day to its southern neighbor in December, making it the biggest supplier to the US, Energy Department data show. US refiners in the Midwest and the Gulf Coast have invested billions of dollars in machinery in recent years to process the heavy grades produced in Alberta’s oil sands. A set of crude pipelines and rail networks bind the two countries energy markets together.
While close ties give Canada a direct link to the biggest oil-consuming country, access is limited to other international markets such as Asia, where prices are often higher. “Any time we can get our crude off shore in Canada is a good thing,” Tim Pickering, founder and chief investment officer of Calgary-based Auspice Capital Advisors Ltd. “There is incremental demand from the Asian marketplace.” Iraq’s Basrah Heavy crude in Asia traded at about a $11 a barrel premium to similar Western Canadian Select Friday, data compiled by Bloomberg show. That compares to a premium of $2 a barrel about a year ago.

FEW ALTERNATIVES
Should a tax be imposed on oil exports to the US, Canada has few alternative customers for its crude, Kevin Birn, a director at IHS Energy in Calgary, said by phone. Most of Canada’s crude exports that don’t go to the US originate from platforms in the Atlantic, off Newfoundland. The UK was Canada’s second-biggest export market for oil last year, buying about 20,000 barrels a day. While some Canadian crude is shipped to the US Gulf Coast for re-export overseas, Kinder Morgan Inc’s 300,000 barrel-a-day Trans Mountain is the only pipeline that links a Canadian seaport to Alberta. Still most of what flows down the line goes to US refineries in Washington state.

TRANS MOUNTAIN PIPELINE
That’s poised to change by the end of the current decade when Kinder Morgan is scheduled to expand the Trans Mountain Pipeline to 890,000 barrels a day. The company forecasts that about 450,000 barrels a day of crude will go to northeast Asia, according to a market analysis it submitted to Canadian regulators in September 2015.
With the pipeline to the Pacific, heavy Western Canadian Select crude could be sold to Asia at a discount to West Texas Intermediate futures of about $8 a barrel versus more than $14 now, translating into an extra $3.9 billion a year for Western Canadian producers, Pickering said.