Monday, June 1, 2015

Canada joins the big league

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The oil sand revolution has resulted in Canada becoming one of the world’s five largest oil producers.
The country’s role in oil has changed dramatically down the years, driven by synthetic crude production in the Alberta oil sands.

Oil sands reserves have only recently been considered to be part of the world's oil reserves, as higher oil prices and new technology have enabled profitable extraction and processing.

Today 97% of Canada’s oil exports go to the US via rail or pipeline, although new developments will no doubt have a significant impact on both the tanker market and international trade flows, Gibson said in a recent report.

Canada is a net exporter of crude, despite crude imports amounting to more than 40% of the annual requirement. The country has extensive natural resources but with the burden of a mountainous landscape and poor weather conditions leading to the densely populated eastern provinces of Canada, such as Quebec, isolated from the centre of oil production in the West.

The logistical challenges in moving domestic oil from the West (due to terrain and the dilution requirement prior to piping) along with the East refineries light sweet diet results in Canada, the only country able to legally import US crude oil, having a dependence on light sweet crude both from the US and further afield.

Crude oil imports into Eastern Canada via ship have been on the increase and there has been a boom in the number of tankers trading crude from the US Gulf Coast on both Suezmaxes and Aframaxes.

Since the increase in US domestic production, crude oil from the USGC can be purchased at a discount to imported crude from traditional suppliers. The volume of imports from the USGC is increasing year on year, which has resulted in a freight requirement that has started to soak up some of the available tonnage in the region.

In 2013 13.6 mill barrels of crude was imported from the USGC to East Coast Canada, which increased significantly to 39.9 mill barrels in 2014.

With the volume for the first quarter of 2015 already higher than that of previous years, it looks like  tanker imports are set to increase still further, Gibson said.

New plans for Energy East, a cross-Canada West to East pipeline with a capacity of 1.1 mill barrels per day are being put forward to allow the movement of diluted domestic oil from the West to the import dependant Eastern provinces.

The cost of a barrel to be produced from the Alberta oil sands is high and with the breakeven mark being in the region of $60-65 per barrel, it is not economical to go ahead with this project in the current market conditions.

Fortunately, weakening of the Canadian dollar versus US dollar has softened the blow of the oil price crash for Canada but without an increase ithere will have to be a production cut, easing the demand for this multi- billion dollar pipeline pushing it further into the future.

This in turn should increase imports of crude from the USGC and with it, the derived-demand for Aframax and Suezmax tonnage.

With a light sweet requirement in the Eastern provinces the question might be raised on why there is a need for a pipeline to transport the heavy bituminous oil sands from the West if Eastern refineries could not process them.

Suncor is looking to add a coker to its Montreal refinery, which would allow for oil sand processing and for East Canada, in addition to energy independence, there is potential new dynamic, crude oil export trade.

A pipeline will not only be used to supply East Canada with domestic oil but it will also open up new trade routes from the East coast of Canada, acting as a gateway to those markets currently untouched by this unconventional oil.

Canada has estimated reserves of 173 bill barrels (the third largest in the world) of oil and opening this up to the Atlantic could add a new dimension to the oil markets.

In the short term, the question for tankers is two-fold;

1) Will the volume of crude being imported from the USGC increase further?

2) Will this increase be enough to soak up enough of the tonnage to see rates rise.
In the long run, the question surrounding the supply of Canadian’s heavy oil to external markets remains an open one, although the heavy oil from Latin American producers may have just found another competitor.

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