Canada Sands Yield More Oil for U.S.
July 12, 2006The Wall Street Journal
By Tamsin Carlisle
Recent expansion of the pipeline network linking Alberta's rich oil sands to the U.S. is fueling a big increase in cross-border exports of Canadian oil -- and easing any lingering U.S. concerns that much of Alberta's oil will flow to China.
According to U.S. government figures, the U.S. imported 205 million barrels of crude oil and petroleum products from Canada in the first quarter of 2006, up 10% from 187 million barrels in the first three months of 2005. Canada's share of total U.S. oil imports for that period rose to 17% from 16%. That offset almost all of a decline in U.S. oil imports from Persian Gulf countries -- which shrunk to 15% from 18% over the period -- making Canada for the first time a more important supplier of oil to U.S. markets than the Middle East.
This sea change represents the surest sign yet of the Canadian energy sector's determination to keep valued U.S. customers well-supplied both with crude oil and refined-petroleum products.
At the same time, some prominent U.S. energy analysts have developed the view that China's moves to secure international petroleum reserves, including recent investments in Canadian oil-sands and pipeline projects, will enhance rather than threaten energy security for other oil-importing countries.
"It is important to get China's situation into perspective," Cambridge Energy Research Associates Chairman Daniel Yergin recently told the U.S. House Committee on Energy and Commerce. "From the viewpoint of consumers in North America, Europe and Japan, Chinese and Indian investment in the development of new energy supplies around the world is not a threat but something to be desired, because it means there will be more energy available for everyone in the years ahead."
In the past few months, Canadian oil producers have thrown their support behind key U.S. pipeline projects that have opened the way for Canadian crude to be shipped all the way to oil refineries on the U.S. Gulf Coast. One project has reversed the direction of flow in an underused pipeline that used to carry oil from the Gulf Coast north, instead enabling Canadian oil to flow south. The payoff for oil-sands producers has been immediate: a sharp increase in the price of Canadian bitumen -- the sticky black crude found in oil sands -- relative to higher-price benchmark crudes such as West Texas Intermediate.
"Canadian heavy-oil producers have experienced a significant increase in profitability in the last two months," analysts at Calgary, Alberta, brokerage firm Peters & Co. note in a recent overview of North American energy.
Although the North American bitumen market typically strengthens in summer, because of seasonal demand for asphalt used in road construction, the Peters analysts and others argue that this year's larger-than-normal increase in heavy-oil prices marks a "fundamental shift" in the long-term economics of the heavy oil business that will likely make U.S. markets significantly more attractive to Canadian oil exporters.
Historically, most of Canada's heavy-crude exports have been sold to a handful of petroleum refineries in the U.S. Midwest equipped to process such intractable feedstock, but the recent rise in Canadian bitumen output from oil sands quickly saturated that limited regional market, pushing down bitumen prices to about half of the West Texas Intermediate crude price in this year's first quarter. Since April, the new pipeline links have relieved much of the downward price pressure on Canadian bitumen, while providing another supply option to U.S. Gulf Coast refiners that previously imported heavy oil feedstock from politically unstable markets such as Mexico and Venezuela.
Partly because of the prospect of further improvements in U.S. market access for Canadian heavy crude, Canada's National Energy Board, in its latest forecast, predicts that Canada will nearly triple oil production from its oil sands to three million barrels a day in 2015, an increase over the energy regulator's earlier projection. Other recent industry forecasts project an even bigger surge in Canadian production, with the Canadian Association of Petroleum producers predicting that Canada will pump 4.6 million barrels of crude a day in 2015, including 3.5 million barrels a day from oil sands.
Just last month, BP PLC and Marathon Oil Corp. each said they will invest about $3 billion to convert U.S. oil refineries so that they can process Canadian heavy crude, helping to ensure a sufficient market for the expanded oil-sands output.
Another strong signal that Canadian oil-sands producers are chiefly targeting the U.S. for exports comes from Canadian industry plans to invest heavily in specialized refining capacity for converting bitumen to synthetic light crude oil-an easily refined petroleum feedstock with a large and ready market in the U.S.
Despite concerns over rising construction costs, Canadian oil-sands producers have tabled 14 proposals to build new bitumen-upgrading capacity or expand existing capacity, according to the Canadian Association of Petroleum Producers. If all of those projects were to be built, Canada's bitumen-upgrading capacity would more than triple by 2015 to almost 2.9 million barrels a day from about 800,000 barrels a day currently. That wouldn't leave much unconverted bitumen production available for export anywhere -- let alone to China.
The backers of proposed new pipelines for moving Alberta heavy crude to Canada's west coast, whence it could be exported by tanker to Asian Pacific markets and U.S. refineries in California and the Pacific Northwest, still see strong potential for some Canadian oil exports to China, but the volumes wouldn't be large -- about 300,000 barrels a day, according to project proponent Enbridge Inc. "The interest from shippers is significant," said Glen Herchak, a spokesman for the Calgary pipeline company.
Meanwhile, U.S. oil companies may be plotting moves to secure future supplies of Canadian oil. During a recent presentation in Calgary, Standard & Poor's director of utilities, energy and project finance, Michelle Dathorne, said some larger U.S. oil concerns may be shopping for acquisitions in Canada's oil sands -- a resource that for them represents "a nice, stable, secure long-term source of oil."