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White Rose Goin’ Messin’ Up My Mind? The Strange Canadian Crude Export-Import Anomaly

Could the US end up exporting 700 MMb/d of crude to Canada by the end of the decade? Despite static domestic refinery demand and a growing production surplus, Canadian imports of crude increased this year. How could that be? The reason for this apparent anomaly is that East Coast Canadian producers are getting better prices exporting their crude anywhere but the US rather than competing at home against cheaper imports from South Texas and North Dakota. Today we explain some unintended consequences of the US crude export regulations.

This is a complex explanation so hold on to your hats as we walk through what is actually happening today and could increase dramatically in the future – the import of cheap US crude into Canada to replace similar grades produced locally that are being exported elsewhere for higher prices. Our story starts - with government regulation in the shape of the US crude oil export rules. We have previously detailed these rules administered by the Bureau of Industry and Security that dictate US produced crude and/or lease condensate cannot be exported (see Fifty Shades Lighter the Lease Condensate Export Problem). The export ban applies to all countries except for Canada and to all US crudes except for limited quantities of California and Alaskan production. One consequence of the ban would seem to be somewhat lower prices for some US light crudes. That is because US refineries are not configured to handle the preponderance of light crude from greatly expanded domestic shale production, so supplies are beginning to outstrip refinery demand. That in turn is causing US crude prices to move below overseas levels, in part because the surplus cannot be exported to compete in international markets.

Let’s switch horses now to Canada – where there is no such export ban on crude. In fact the Canadians produce a far greater volume of crude than they can consume internally so most of their output is exported. However, as we have detailed many times in RBN blogs, Canadian producers have experienced considerable crude pricing challenges of their own because the vast majority of their exports go to one country - the United States. That is because of limited takeaway routes to the Coasts and hence to other destinations (see West Coast Pipe Dreams and What Becomes of the Empty Pipelines). With no economically viable alternative to the US market, Canadian producers find themselves competing head on with growing US shale production for pipeline capacity to market. They are also competing in markets where supplies exceed refinery demand – first in the Midwest and now increasingly at the Gulf Coast (see Handling the Texas Gulf Coast Flood of Crude). As a result the prices that Canadian producers get in the crowded US market are heavily discounted versus overseas alternatives (see How Canadian Crude Price Discounts Drive Storage Volumes).

And Canada has few current alternatives to the US market. The main pipeline route for non-US exports from the West Coast is the Kinder Morgan TransMountain (TMX) pipeline that runs from Edmonton to Vancouver. The TMX currently ships up to 300 Mb/d and although there are plans to expand its capacity to 890 Mb/d those will not come online until at least 2017 if they are approved (see West Coast Pipedreams Part 1). Until then TMX is oversubscribed and refineries in Vancouver and Northwest Washington State consume most of its crude – leaving only limited volumes for overseas shipments. Those shipments are further constrained because they have to be made on AFRAMAX tankers (up to 750 MMBbl) rather than lower per/barrel cost Very large Crude Carriers (VLCC’s over 1 MMBbl) since the Westridge Marine Terminal near Vancouver is not a deep-water port.

Canadian East Coast exports are also constrained because of the lack of pipelines across the country from the Western Canadian production region. That constraint should disappear in the next few years if the planned Enbridge Line 9 Reversal and TransCanada Energy East project are completed. But these routes to the East Coast are still at least a year away, if not longer. In the meantime the only possible Canadian crude exports from the East coast are the output of three production fields off the coast of Newfoundland. Together these three offshore East Coast Canadian fields – Hibernia, Terra Nova and White Rose - account for about 200 Mb/d of light and medium gravity crude. While there is a ready market for that production at Eastern Canadian refineries, as we shall see there are no rules to prevent its export.

The only other way for Canadian crudes to reach the coast for export is by rail transport to Canadian or US ports for onward shipment to overseas markets. But although a number of plans to do just this have been announced, as yet they have not been implemented. The two most widely touted opportunities are to ship Western Canadian crude by rail to US deep-water West Coast ports in Oregon and Washington State for export and to ship Canadian crude by rail to Albany New York for export from the East Coast of the US.

To sum up, US crude prices are discounted against international levels in part because the pressure of rising domestic production cannot be relieved by exports and Canadian producers suffer from discounts in the US market because of congestion and oversupply in the only export market they can currently ship their crudes to in any meaningful volumes. And the result is lots of frustration building up on both sides of the border. One solution might be to end the ban on US exports. At which point – the argument goes - surplus US light crude supplies would be exported, reducing the downward pressure on prices and Canadian producers would benefit from a general increase in US prices back to international levels. Your guess is as good as ours as to whether the political situation in Washington will ever allow that to happen.

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