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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Canada Bets On Trans Mountain Expansion To Sell Oil In Asia

Pipeline pieces

Canada may be the fourth largest producer and third largest exporter of oil in the world, but it has one sole customer of its oil—the United States.

At the end of last month, Canada took a step toward ensuring that its oil would have an export outlet to the world’s fastest-growing energy market, Asia.

Analysts believe that the federal government stepping in to save the Trans Mountain expansion project has boosted the chances that the pipeline will be built and give Canada an export outlet from the Pacific Coast to the Asian markets. The industry is cautiously optimistic, but some companies say that Canada must do more to level the playing field for its oil.

Last year, Canada’s crude oil exports increased by 6.5 percent annually to 3.3 million bpd. Of those, exports to destinations other than the U.S. accounted for just 0.8 percent of all, according to data by the National Energy Board (NEB).

Due to congested takeaway capacity and lack of enough pipelines to either the Pacific or the Atlantic Coasts, Canada’s oil is currently priced at a huge discount to the U.S. benchmark. The discount at which Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta—trades relative to West Texas Intermediate (WTI) has been US$20, and at times US$30 a barrel this year.

Fierce opposition in British Columbia has forced Kinder Morgan to reconsider its commitment to expand the Trans Mountain pipeline that would increase the daily capacity of the pipeline to 890,000 bpd from 300,000 bpd. So the Government of Canada reached an agreement with Kinder Morgan last month to buy the Trans Mountain Expansion Project and related pipeline and terminal assets for US$3.5 billion (C$4.5 billion). Related: Oil Falls On OPEC Uncertainty

The Canadian push to seek more customers (and higher prices) for its oil coincides with a heightened trade dispute between the U.S. and Canada.

“You could argue the timing was intentional, but this was going on well before Nafta [renegotiations],” Dana Peterson, U.S. and Canada economist at Citigroup, told CNBC. “The Canadian government needs another venue for evacuating oil, and that’s westward. They need another buyer, and that’s Asia.”

Canada owning Trans Mountain greatly boosts the chances of the project, although it’s not a certainty yet, according to analysts.

“As a crown corporation, it would have a better standing in these challenges,” Jackie Forrest, vice president of energy research at Arc Financial Group, told CNBC, referring to the several lawsuits against the project that B.C. has filed in recent months.

Access to new markets—especially to fast-growing Asia in which all other major oil exporters compete to sell—is important to both Canada’s oil industry and government, according to Forrest.

“The prices to Asia, minus the transportation costs, means every barrel that goes to Asia would get a higher price than it would in North America. Because of the discount for WTI (West Texas Intermediate), selling it to North America is not nearly as profitable as selling into Asia,” Forrest told CNBC.

Although the amount of Canadian oil that would be shipped to Asia is not huge, the project—if completed—would be a game-changer for Canada’s oil industry, according to John Kilduff, partner with Again Capital.

“This move by the Canadian government to build the pipeline sets up a future U.S.-Canadian rivalry for Asian market share,” Kilduff told CNBC.

“The TMEP [Trans Mountain expansion pipeline] is critical infrastructure needed to move Canadian energy to world markets and restore investor confidence in Canada’s economy and political system. It signals Canada is open to business and energy trade with international investors,” the Canadian Association of Petroleum Producers (CAPP) said, commenting on the government’s move to buy the pipeline. Related: Was This Just A Temporary Pullback In Oil?

However, Steve Williams, chief executive of one of the biggest Canadian producers, Suncor, is more cautious and says that his view that Canada is lagging behind in competitiveness hasn’t changed with the government buying Trans Mountain, although he is confident the pipeline will be built.

“On the one hand, it’s a clear, unambiguous commitment that it’s a piece of infrastructure which is in the national interest and needs to be built. On the other hand, it’s also recognizing that the normal processes didn’t work very well,” Williams said this week.

Suncor will not be splashing money on new growth projects, because Canada’s oil industry’s competitiveness is “not in great shape,” Williams said.

“And competitiveness for me is the sum of all those things, so royalties, taxation, regulatory certainty, confidence in regulators today and in the future. And we need to make some progress,” the manager noted.

By Tsvetana Paraskova for Oilprice.com

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  • Kr55 on June 10 2018 said:
    Canada should start looking at reviving Energy East after this G-7 fiasco. Being so dependent on the USA is no longer smart by any stretch.

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