Ewart: Canadian producers eye profits through U.S. ports

Calgary Herald | March 17, 2014 | Column by Stephen Ewart

Stephen Ewart is the Calgary Herald's Energy and Economics editor and columnist. Photograph by: Gavin Young , Calgary Herald

As the battle over American crude oil exports heats up, Canadian producers have seemingly found a route to lucrative international prices through U.S. ports. If producers move Canadian crude by rail to U.S. tidewater ports and then onto global markets it doesn't fall under the four-decade-old ban on domestic oil exports in the U.S. and circumvents the issues around pipeline access and price differentials in North America.

It's "very doable" Calgarybased Crescent Point Energy said this week.

Crescent Point moves more than 30,000 barrels a day by rail from properties primarily in Saskatchewan, where the Bakken light oil formation juts into Canada. The fast-growing producer responded to pipeline bottlenecks and supply gluts in the midcontinent by moving oil by rail to markets on the coasts over the past two years to boost netbacks. It now intends to go one step further.

"We know there is already some Canadian crude that is being exported through the U.S., so it is very doable," Trent Stangl, vice-president marketing, said on a conference call with investors and analysts Wednesday. "We're working hard to get something in place by the end of the year."

The surge in U.S. crude oil production in recent years has depressed the price for benchmark West Texas Intermediate compared with North Sea Brent. The situation has been exacerbated by a lack of pipeline capacity in new producing areas of North America that's pushed record amounts of crude onto rail as producers seek out higher returns.

Inevitably, that search is extending to lucrative offshore markets. Just over a year ago, WTI traded as low as $23 US per barrel below Brent, but that discount has closed to closer to $6 recently. The U.S. Energy Information Association forecasts the WTI-Brent spread to average $11.46 US per barrel in 2014.

Four U.S. oil refiners launched a lobbying campaign this week to stem the calls for Washington to lift the ban on most oil exports. Their action is in response to American producers stepping up efforts to sell the suddenly abundant supplies of domestic oil overseas.

As with most issues around oil and gas in the United States, it's a politically sensitive topic. Energy independence has been a goal of every U.S. president since Richard Nixon and even as the shale revolution has meant the highest production in 24 years the U.S., it still imports 40 per cent of the oil it consumes.

When Keystone XL proponent TransCanada, opened the southern leg of its controversial pipeline earlier this year CEO Russ Girling felt compelled to repeat for Americans that there was "not a chance" the oil - mostly Canadian crudes, but some U.S. - would be exported.

The current crisis in Ukraine has bolstered support for exports from the U.S. from oil producers as a way to loosen the grip of Russia and the cartel OPEC. The ban on exports dates to the Arab oil embargo of 1973. Alaska Sen. Lisa Murkowski has led the call to ease restrictions as producers seek new markets for its crude.

There is concern lifting the embargo would undermine new-found U.S. energy security, but cracks are beginning to appear in the ban.

Exports of refined petroleum products from the United States were a record 4.3 million barrels a day in December and oil giant BP has agreed to purchase oil from a Texas refinery that critics say processes it "just enough" to skirt the ban on crude exports.

With passageways to overseas markets through Canadian ports limited due to pipeline access, Canadian oil producers are smart to look to the U.S. as a channel to overseas customers - primarily in Asia - where the "world prices will prevail," said Scotiabank vice-president and commodity market specialist Patricia Mohr.

The National Energy Board, which issues permits for oil exports, reported Canadian crude exports to the U.S. in 2013 were 2.6 million barrels a day and just 79,000 barrels a day to other countries.

"The U.S. market has more than enough light oil," Mohr told the Herald's Dan Healing. "Canadian light oil producers need to develop other market outlets for their crude The U.S. is unlikely to end its ban on U.S. crude oil exports soon, in my view. Shipments to Canada are effectively exempt from the ban."

Oil produced in Canada requires permits from the U.S. Department of Commerce and the Bureau of Industry and Security before it can be exported and companies must ensure it is segregated from U.S. crude so moving it by rail car provides far more certainty there was no commingling.

Crescent Points' Stangl didn't predict any volumes for overseas sales but said there are "no regulatory hurdles" to get over to reach new customers.

If it's simply a matter of roundabout logistics, the industry has proven oil will get to market.

Stephen Ewart is a Calgary Herald columnist. [email protected]


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