Crude Summit: Canadian oil to compete directly in Asia

Canadian crude output will trend higher and compete directly with other waterborne crudes as the market takes advantage of excess pipeline capacity, says Naomi Esfahani, senior advisor at MEG Energy.

"With the Trans Mountain (Expansion) starting up, there will be a substantial amount of crude that has access to west coast Canada," Esfahani said today at the Argus Americas Crude Summit in Houston. That expansion will provide nearly triple the existing 300,000 b/d of pipeline capacity between oil-rich Alberta and the west coast and provide a much shorter voyage to Asian markets.

"These barrels will be able to compete to front-month loadings and compete directly with Dubai-based crudes," Esfahani said, as opposed to the current two-month lag from when they are traded in the US Gulf coast to then being consumed abroad.

Colin Gruending, president of liquids pipelines at Enbridge, expects the competing Trans Mountain Expansion pipeline to be online sometime in 2023 but his company is eyeing even more capacity to the US Gulf coast.

"We see another 200,000 b/d coming through here," Gruending said, with efficiencies being pursued throughout Enbridge's system, including the Flanagan South, Seaway and Express pipelines.

"We think exports out of the Gulf, and Houston in particular, are strategic," said Gruending. "North America will be long hydrocarbons" and getting to the water is a theme whether its via west coast Canada, Texas or Louisiana.

Enbridge commissioned its Line 3 Replacement Project connecting Alberta to Wisconsin, effectively adding 370,000 b/d of new capacity that is shared between heavy and light crudes. That step-change has provided relief to Canadian inventories by allowing more volumes to clear the market.

"Line 3 has changed quite a bit of this picture with more flows having access to exports out of the US Gulf coast," said Esfahani, whose employer produces about 100,000 b/d of high-TAN heavy crude in Canada's oil sands region.

Much of the pull is coming from China, India and southeast Asia, and Esfahani chalks part of that up to refiners there no longer treating Canadian crudes as obscure grades. Rather, they are starting to embrace Canadian grades in order to diversify sources, putting Canadian oil head-to-head against those from the Mideast that Asian refiners are traditionally accustomed to buying. Esfahani also expects trading liquidity to rise because of the use of Aframaxes on the west coast once the Trans Mountain Expansion is complete.

With uncertainty in the long term outlook for global crude demand, Canadian producers now have to weigh the life span of their projects. It can take three to five years from sanctioning to first oil, said Esfahani, but the projects can produce for decades which can put a kink in growth plans.

Esfahani and Gruending anticipate a prudent approach to development in Canada's oil sands by sanctioning projects that may have been deferred or focusing on getting assets to nameplate capacity.

But "production will fill up egress, maybe gradually," said Gruending. "Disciplined capital allocation collectively will fill that egress over time."

In the meantime, both Esfahani and Gruending agreed that having a little excess capacity is never a bad thing.

By Brett Holmes