Notes on geopolitics as Canadian crude pushes toward the Gulf Coast This article appears in the June 2008 issue of Oilsands Review.By Peter McKenzie-Brown
“There certainly appear to be a lot of forces increasing the demand for Canadian heavy, particularly in the US,” says Steve Wuori. Enbridge’s executive vice president observes that right now only Venezuela and Mexico are seriously competing for the heavy oil market in the Gulf Coast, and “there are declines in Mexican supplies for geologic reasons, and Venezuelan declines for both economic and political reasons. So structurally it’s a very good time for Canadian heavy oil to secure that market."
Wuori’s comments reflect a sea change in Canada’s approach to selling the stuff. Early bitumen development in Alberta was slow and easy – regional producers supplying heavy oil to refineries in America’s northern tier states, with virtually no competition from overseas. Today, with surging supplies projected well into the future, Canadian producers, pipelines and marketers have had to become aggressive. Global forces are having a greater impact on the industry than ever before. This is a good news/bad news story. The good news is that there are chinks in the armour of our offshore competitors – lots of them. The bad news is that the chinks in Canada’s armour are costing the country dear. Consider the following.
- Already the world leaders in bitumen production and an important producer of conventional heavy, Canadians have roughly doubled their non-upgraded bitumen production in less than four years.
- American decision-makers would be delighted to replace politically volatile Venezuelan supply with low-risk Canadian product, and Venezuela’s present leadership would be equally happy to develop markets elsewhere.
- Mexico’s supergiant Cantarell heavy oil field is in steep decline, but Canada has the productive potential to offset the shortfalls.
- The isolation of the Canadian prairies from the world’s sea lanes and from America’s major refining centres means bitumen producers can’t freely compete in world markets. Consequently, they get lower prices.
- As price-takers in North American markets, Canada’s producers have to settle for lower profits, and the province has to settle for diminished royalty revenue.
- Enbridge’s Access Pipeline would expand existing pipe and extend the system from central Illinois to the Gulf. This would provide 445,000 barrels per day of capacity. ExxonMobil is a 50 per cent joint venture owner of the proposed pipeline and owns useful rights-of-way.
- TransCanada is also considering several possibilities – notably (with Conoco Phillips) the Keystone project, which will convert a segment of TCPL’s natural gas mainline for oil transportation.
- Another possible entrant is the Chinook system – a 300,000 barrel-per-day proposal by two American firms, which would use existing rights-of-way to ship.
- The Altex Pipeline – proposed by a private company – would use new technologies to ship 425,000 barrels of bitumen per day south.
Upgrader Option: As resource owner, the government of Alberta receives its royalty share from bitumen and heavy oil production in kind – that is, it receives oil, which it then needs to turn around and sell. Most producers that upgrade their oil sands in Alberta into lighter crude or petroleum products pay royalties based on the bitumen price.