July 7, 2013 11:33 pm

Canada boosts its slice of global oil exports

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The campaign to block the Keystone XL pipeline to carry crude from the tar sands of Alberta to US markets may have succeeded in delaying the project, but it has not been able to stop the growth in exports of Canadian oil.

As the revival of US oil production has cut imports overall, Canada has nevertheless increased its market share.

Canada has the world’s third-largest oil reserves, behind Venezuela and Saudi Arabia. The growth in its exports has been a reminder that for all the political focus on the Keystone XL project, there are many other ways for that oil to reach a market.

US imports of Canadian crude hit an all-time high in February at 2.8m barrels per day, and have held at about 2.5m b/d since then, compared with an average of 2.4m b/d in 2012 and 2.2m b/d in 2011.

Even better, from the point of view of Canadian oil producers, has been the recovery in the price.

At the end of last year, Western Canadian Select, the benchmark for crude in Alberta, was trading at a discount of more than $42 per barrel to US benchmark West Texas Intermediate. By the end of last week, that gap had closed to less than $15, representing a near-doubling in the price of Canadian oil from about $45 per barrel to about $85.

The reasons include higher demand caused by the planned start-up of capacity at BP’s Whiting refinery in Indiana, which will use oil sands crude, and supply disruptions following the recent flooding in Alberta.

The underlying cause, though, has been a sharp increase in transport capacity, both in rail cars to carry oil across the border, and in pipelines inside the US to bring it to refineries.

Canadian rail export capacity, almost non-existent in 2011, reached 120,000 b/d by the end of last year. It will hit 200,000 b/d this year and 300,000 b/d in 2014, according to Barclays Capital.

An accident over the weekend at Lac-Mégantic in Quebec, which killed at least five people, involving a train carrying US crude from North Dakota, highlighted the risks involved in this form of transport.

Rail is still a relatively expensive form of transport. The journey from Alberta to refineries on the Gulf of Mexico coast that are configured to take the heavy and sour Canadian crude might cost about $20 per barrel, compared with about $5 for a pipeline.

However, the trains do not need to go all the way to the gulf. Some Canadian oil can be used inland, at refineries such as Whiting, and there is also a sharp increase under way in pipeline capacity to carry crude from the interior of the US to the gulf.

Miswin Mahesh of Barclays says: “Rail capacity has surprised many people with the expansion of how much it can carry. Pipeline capacity from Canada to the gulf coast hasn’t increased, but producers don’t really need to get their oil all the way to the gulf coast.”

Keystone XL is not the only controversial export project. Enbridge’s Northern Gateway, intended to carry oil to an export terminal on the coast of British Columbia, has also faced political opposition, including from the government of that province.

Jackie Forrest of IHS, the consultancy, says: “If Keystone XL were cancelled, there would be other projects that would advance.”

That does not mean the US decision on Keystone XL, expected this year, will make no difference. There are signs that the uncertainty over the outlook has put a damper on new oil sands investment plans, and approval would remove that uncertainty. For as long as there is demand for oil, though, businesses will be working on new plans to use Canada’s reserves to meet that demand.

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