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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is This The Next Disaster For Canadian Drillers?

The government of Alberta this week took an unprecedented decision to enforce a crude oil production cut so excess inventories could be shrunk and the price of western Canadian grades could improve, but the industry’s problems are far from over. They will be among the hardest hit by the International Maritime Organization’s new emission rules, to enter into effect in two years, which will require a reduction of the sulfur content of bunkering fuel to 0.5 percent from 3.5 percent.

“We’ve got challenges with respect to pipelines, we’ve got challenges with respect to rail and now we’ve got challenges with respect to our demand market,” Bloomberg quoted the chief executive officer of the Canadian Energy Research Institute as saying at a presentation this week. The emission rules will start affecting the price of Canadian crude next year, Allan Fogwill, along with other analysts, believes.

Canadian crude is heavy and sour, that is, high in sulfur content, which is the obvious reason why the IMO changes would affect prices, adding to already substantial pressure from pipeline bottlenecks and the rising amount of crude that is being transported by costlier rail.

According to IHS Markit analyst Kurt Barrow, the emission rules will make Canadian crude another $7-8 cheaper than West Texas Intermediate in 2019. Even the completion of the Line 3 replacement project won’t offset these losses, although it will add 375,000 bpd to daily pipeline capacity.

Another analyst, Wood Mackenzie research director Mark Oberstoetter, told Bloomberg Western Canadian Select will likely be US$20 cheaper than WTI for most of 2019, which is the cost of railway transportation for Albertan heavy crude. All in all, things are looking pretty bad. But how bad is bad? Related: OPEC Oil Exports Jump Ahead Of Meeting

For one thing, Canadian heavy is the main heavy crude feedstock for U.S. refineries. Canada is in fact the biggest exporter of crude to the United States, at a rate of over 4 million bpd as of September, according to data from the Energy Information Administration, which compares with around 3 million bpd from OPEC. There aren’t a whole lot of alternative sources of heavy crude, what with Venezuela spiraling down into a deeper crisis and production falling along with exports.

For another, the new emission rules will not eliminate demand for fuel oil, it will only reduce it. Reuters recently polled 33 refiners on their IMO 2020 plans and found that although as much as 40 percent planned to stop producing high-sulfur fuel oil, the rest had no plans to suspend production despite the expected drop in demand. Instead, they were upgrading their refineries to further process the residual petroleum product into more gasoline and diesel, and also banking on stable demand from the power generation sector: when fuel oil becomes cheap enough, it serves as an alternative to coal.

The new emission rules will definitely present a new challenge to Albertan producers on top of what they already have to deal with. However, the importance of their crude for U.S. refineries and the low prices that have opened up the Chinese refining market for more Canadian oil exports should serve as a cushion against major price and production shocks.

By Irina Slav for Oilprice.com

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  • Lahkweeshah Uvitirah Yahkwaanzah Smith on December 04 2018 said:
    Get Justy to go back to India and dress up as a Hindu, again, and offer up a Globalist prayer to their 1,000,000 + gods.
  • Robert Ziegler on December 04 2018 said:
    I don't know why this IMO rule always is reported as "an end to heavy oil bunker fuels": These large engines lend themselves very well to the installation of scrubbers to clean up the exhaust gases, which is the other available method of compliance: Vessel operators can either switch to cleaner, but more expensive, marine gasoil or install scrubbers to filter sulphur from dirtier fuel oil.
    This filter technology is mature, and would be my preferred way of compliance as a ship owner. As usual in the energy field, fake news abounds......
  • Murph on December 06 2018 said:
    Hi Robert,
    Just as a counterpoint to your declaration of fake news:
    By no means an expert but, consider that scrubbers are a considerable investment as are refinery upgrades. I'd imagine that distributors of bunker fuel have more alternatives for selling than shipping companies do for buying so I'm inclined to agree with your assessment. Bargaining power looks like it rests with distributors.
    Shipping companies however may look at the tradeoff between slightly higher fuel costs and upgrading their fleets and choose to pay the higher fuel costs associated with increased refining. If they do, and only some distributors choose to offer this product then the rest will lose by having not upgraded their refineries.
    Obviously if all distributors acted in concert they would benefit by making the shippers pay the burden of the new regulation but because they are worried that they might lose market share if they don't upgrade they likely will.

    Anyways, it is certainly a possible scenario so saying "fake news" may not be accurate.
  • Jan van Eck on December 06 2018 said:
    There are perfectly valid reasons why ship-owners do not install scrubbers. When you talk with Maersk, they feel that it is the oil industry responsibility to supply a suitable fuel at dockside for loading, rather than for each individual ship to have some modification technology on-board (just as your car does not have gasoline modification technology in the fuel tank, either). Then there are the technical reasons: (1) the scrubber machinery takes up valuable real estate, and competes with necessary ballast-water treatment machinery, also mandatory, for the real estate; (2) ships need to go into "special surveys" after age 15, which are expensive and tend to lead to ship scrapping, so who is going to go spend millions on scrubbers on an older ship that is going to be leaving service soon enough? (3) a drop-in liquid fuel may be available and cheap, specifically methanol, which would require little modification cost and no space; (4) the oil industry figures out how to upgrade sour bunker on the cheap and the shipowner ends up having to do nothing.

    Although low-sulphur diesel will likely double the fuel bill for the charterer, they can also offset that cost by doing "slow steaming," running at lower rpm's as long as they can stay compatible with the engine design for exhaust temperatures, and that may offset the bills somewhat.

    I anticipate that ship owners will avoid installing scrubbers. If the entire industry ends up facing a higher fuel bill, then all charterers face the same costing and all it does is make each containerload equally more expensive. So should they care? Nope. Besides, the pirate and bootleg vendors will load bunker anyway, and who is watching out on the High Seas? Nobody.

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