Canadian oil surge to U.S. Gulf puts Mexico on defensive: Energy


Canadian oil surge to U.S. Gulf puts Mexico on defensive: Energy


HOUSTON (Bloomberg) -- A price war is brewing between Canada and Latin America over who will satisfy U.S. Gulf Coast refiners’ hunger for heavy oil.

The new Seaway Twin pipeline will almost double the amount of heavy Canadian crude coming to Gulf terminals and plants to about 400,000 bpd starting in January, according to ARC Financial. The shipments are growing even without the Keystone XL pipeline, which has been delayed for six years because of environmental opposition.

The Canadian supply will square off against crudes from Mexico and Venezuela that have traditionally fed refineries along the Texas and Louisiana coasts. State-owned Petroleos Mexicanos widened its discount for U.S.

buyers in December by the most since August 2013. Valero Energy and Marathon Petroleum, which invested in special equipment to refine heavy crude, stand to gain the most from the Canadian supply.

“Something’s going to have to give,” said Ed Morse, Citibank’s head of global commodities research in New York. “It’s going to have to be combination of Latin American countries exporting less into the U.S. or Canadian crude being re-exported and competing with crudes in other markets, particularly Europe.”

Transport South

New pipelines and rail terminals enabled more Canadian oil to head south to higher-value markets, partially offsetting a 48% collapse in global prices since June as the Organization of Petroleum Exporting Countries refused to cut production to counter a global glut.

The discount of Western Canadian Select priced in Hardisty, Alberta, to Mexico’s Maya crude has narrowed this year by more than half to $11/bbl. Heavy Canadian crude will cost the same in Houston as Maya arriving by tanker, including the cost of transportation, according to data compiled by Bloomberg.

Pemex widened the discount it gives U.S. buyers of Maya to $3.70/bbl in January, from 90 cents in November. Pemex spokesmen didn’t respond to several e-mails requesting comment on the company’s market strategy.

Latin American producers will price their crude to make sure it’s still attractive, said John Auers, executive V.P. at Turner Mason & Co. “It won’t all disappear anytime soon,” he said. The Gulf Coast “is the natural home for it.”

Higher Prices

On Dec. 28, West Texas Intermediate added 56 cents, or 1%, to $55.29/bbl in electronic trading on the New York Mercantile Exchange. Brent, the global benchmark grade, rose 39 cents to $59.84.

Canadian output has grown in the last decade as rising prices made it economic to use steam recovery and bitumen mining in the Alberta tundra. Shipments to the U.S. rose 63% in five years to a record 3.1 million bpd as of September, U.S. Energy Information Administration data show.

The flow to the U.S. increased without Keystone XL, an $8 billion conduit that TransCanada wants to build from Hardisty to an existing network in Steele City, Nebraska. The project is awaiting a decision by the Nebraska Supreme Court on a legal challenge and then a final determination by President Barack Obama’s administration.

Enbridge operates a system that can ship 2.5 MMbbl of crude from Canada to the Midwest, and last month finished a line extending to Cushing, Oklahoma. Enbridge and Enterprise Products Partners built the 450,000-bpd Seaway Twin to double capacity to Houston from Cushing.

TransCanada’s existing system can bring 540,000 bpd from Canada to the U.S. Midwest, and the company built a 700,000-bpd line from Cushing to Texas last year.

Fewer Imports

While Canadian shipments have grown, imports from elsewhere contracted. U.S. refineries took in 4.3 MMbbl of crude a day from the rest of the world in June, the lowest amount since 1992.

Mexico sent 675,000 bbl of heavy crude a day to U.S. Gulf refineries in September, down from 835,000 for that month in 2012. Venezuelan shipments fell to 700,000 from 900,000.

If Canadian crude can’t find a home on the Gulf Coast, producers may re-export it elsewhere. The U.S. bars most exports of its own oil, while allowing shipments of foreign petroleum that is kept separate from domestic supplies.

The Commerce Department granted 86 re-export licenses from October 2013 through August. Cargoes have gone to Switzerland, Spain, Singapore and Italy this year, according to the U.S. Energy Information Administration.

Heavy Processing

Countries including Brazil and Saudi Arabia are investing in heavy oil plants now, though most of the ability to process those crudes is on the U.S. Gulf Coast, where refiners invested billions to buy cokers and desulfurization units to process heavy crude from Latin America.

“U.S. refineries built out their capacity to run heavy barrels,” Auers said. “Refineries in the rest of world aren’t built to run heavy barrels.”

The lack of alternative markets for heavy crude means Latin American countries will battle to maintain their share in the U.S., said Stephen Schork, President of the Schork Group.

“We haven’t seen anything like this,” Schork said. “This would be a first.”

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