Suncor Energy Inc. (SU) and Valero Energy Corp. are poised to use only North American crude in eastern Canada by 2015, helping to displace overseas imports.
Suncor’s Montreal refinery will reach that point in 2015 and Valero’s Quebec City plant by the end of this year, the companies said April 29. Imports to Quebec, Ontario and Atlantic provinces from outside North America dropped by more than 50 percent in November from a year earlier. Enbridge Inc. plans to start a pipeline late this year allowing oil to flow to Montreal from fields in North Dakota and Alberta, further reducing higher-priced supplies from Europe and Africa.
U.S. crude production reached a 26-year high in April, increasing stockpiles in the U.S. to the highest since 1931, while Canadian output is forecast to rise 4.1 percent this year. A shift of oil to eastern Canada, coupled with future potential to export crude, could help alleviate the glut and bring domestic prices to an “equilibrium” with international levels, said Tom Finlon, director of Energy Analytics Group Ltd.
“Within a very short period of time, there won’t be any barrels coming into eastern Canada from overseas,” John Auers, senior vice president of Tuner, Mason & Co., an industry consultant in Dallas, said by phone April 30. “Those shipments will be completely displaced by North American crude.”
Since the beginning of 2011, U.S. benchmark West Texas Intermediate crude has averaged $14.02 a barrel less than Brent oil, the international marker, after being at parity over the previous four years. The WTI-Brent spread was $8.83 yesterday, based on settlement prices.
Crude inventories near 400 million barrels in the U.S. are the highest in U.S. data since April 1931, monthly government data going back to 1920 show. Prior to 1976, reports were based on Bureau of Mines figures, according to the Energy Information Administration. Stockpiles on the U.S. Gulf Coast are at a record 215 million barrels.
“That will certainly contribute to the narrowing of the spread to Brent but it’s only the first step in a much longer trip,” Finlon said by phone from Jupiter, Florida, on April 30.
Canadian refineries in Quebec, Ontario and along the Atlantic Coastal region imported 586,838 barrels a day of heavy and light oil in November, compared with 854,784 in the year-earlier period, according to Canada’s National Energy Board.
Of the November shipments, 202,000 barrels a day originated from the U.S., up from 73,000 in November 2012, U.S. Energy Information Administration data showed. That number may double again to 400,000 barrels a day by end of the year, according to Ed Morse, the head of commodities research at Citigroup Inc.
The use of inland crude will increase after the startup of Enbridge’s Line 9B, which is being reversed to carry an initial 300,000 barrels a day of crude to Montreal from North Westover, Ontario. The line will begin to be filled with oil around Oct. 15, the company said in a filing with the NEB.
As more U.S. and Alberta crude is consumed at eastern Canadian refineries, overseas barrels will be redirected to other regions, including Asia, said Skip York, principal analyst for oil research at Wood Mackenzie Ltd. in Houston. The Organization of Petroleum Exporting Countries will also help to cushion any price declines, according to York.
“Because you have OPEC out there, the extent to which the pressure is felt will be limited,” he said May 1. “They have the ability to pull back or add supply to keep prices in balance.”
About 45 percent of Valero (VLO:US)’s Quebec City crude oil originated from North America in the first quarter, compared with 28 percent in previous three months, according to the company.
Suncor shipped 20,000 barrels a day of inland crude by rail to Montreal in the first quarter, saving $10 a barrel on those supplies, said Steven Williams, chief executive officer of the company. The refinery received four cargoes from the U.S. Gulf Coast.
Irving Oil Corp.’s Saint John, New Brunswick, refinery receives crude shipments by rail and by tanker from Albany, New York, and the Gulf Coast.
“Those refineries have the advantage to get some crude oil by ship, as well as by rail and pipeline,” Robert Campbell, head of oil products research at Energy Aspects Ltd., said by phone from New York on April 29. “North America is really one of the only major sources of supply growth so it makes sense they’re moving toward 100 percent.”
The safety of crude-by-rail transportation has been questioned over the last year after a spate of accidents spanning from Quebec to North Dakota. The U.S. Department of Transportation is studying changes in response and railroads agreed in February to slow trains in urban areas and install sensors on tracks used to haul crude.
A CSX Corp. (CSX:US) train carrying Bakken crude derailed in Lynchburg, Virginia, on April 30, increasing pressure on regulators, railroad and tank-car owners to boost safety of shipments. The oil was destined for Yorktown, Virginia, where it could be loaded onto a barge for delivery to a refinery along the East Coast.
Valero has received a license to re-export Canadian crude, allowing the company to transport oil on trains to the Gulf Coast, where it can be put on tankers for the journey up the East Coast. Oil could also be shipped to the Pembroke refinery in the U.K., though the company has no immediate plans to do so.
“The strategy is to have flexibility,” Bill Klesse, Valero’s chief executive officer, said on April 29.
Larger-than-expected production growth in the Bakken or Eagle Ford formations could stall narrowing of the spread, York of Wood Mackenzie said.
Wells in the Bakken are forecast to pump 1.055 million barrels in May, up from 1.034 million in April, the EIA said on April 14. Eagle Ford output is estimated to climb by 31,000 barrels a day to 1.38 million.
“If production grows faster than expectations, you may not see as much pressure on that spread,” York said.
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