Oil sands crude reaching Europe, Asia

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The oil industry is starting to achieve its goal of shipping Alberta crude to new markets in Europe and Asia, even if the routes are not as direct as it would like. Just ask the Swiss.

Volumes are small so far compared with the more than 2.8 million barrels that flow into the United States each day, but they represent much-desired market diversification, and point to a major shift for the industry should TransCanada Corp. win approval for its $12-billion Energy East pipeline to New Brunswick from Alberta.

This year, as other major pipeline proposals such as Keystone XL and Northern Gateway remain in limbo, Canadian oil has travelled though the United States to ports in the south, such as Houston/Galveston and New Orleans. From there it is loaded onto tankers and shipped abroad.

Among the destinations: Spain, Italy, Singapore, and in increasing volumes, Switzerland, according to the U.S. Energy Information Administration. Such exports hit a peak of 874,260 barrels in total in July, before falling back to 346,921 in August. That is up from zero in March.

Canadian producers contend that shipping oil sands-derived crude to overseas markets will boost its value by exposing it to higher international prices. Their traditional export market is the United States, which has recently been amply supplied as U.S. domestic output of light crude has surged.

But Option 1 – major new pipelines to Canada's West Coast and through to the Gulf of Mexico – has been hampered by regulatory and political delay. The re-exports have become a relief valve for both countries by reducing some congestion of supplies within the United States.

"We've got so much rail capacity now and pipe capacity is really starting to come on line, especially heading down to the U.S. Gulf," said Martin King, analyst at FirstEnergy Capital Corp. "One way or another, the market's figured out a way to get Canadian crude to a country other than the United States. It's market diversification – a chance to maybe capture some world prices."

Europe is a major potential new market for Canadian oil that would flow to a planned tanker loading facility at Saint John, N.B., on Energy East. TransCanada filed its application on Thursday to build the 1.1-million-barrel-a-day line.

Today, though, the practice of shipping Canadian oil from U.S. ports, known as re-exporting, can be done with a permit from U.S. authorities, so it does not run afoul of a long-standing – and increasingly contentious – ban on exporting domestically produced oil.

U.S. crude can be shipped to Canada, again with authorization, and the EIA data show such exports climbed to 401,000 barrels a day in July, the highest level of exports in 57 years as production of shale oil surged from regions such as the Bakken in North Dakota.

Tidal Energy Marketing Inc., a unit of Enbridge Inc., is one company that has shipped Canadian crude from the Gulf Coast, sending a cargo to Spain in May.

Last week, Bill McCaffrey, chief executive of oil sands producer MEG Energy Corp., said his company is considering such exports as it becomes easier to move Canadian crude to Houston through expansions of the pipeline network.

Landlocked Switzerland, which has two refineries with a total capacity of 125,000 barrels a day, has been the most consistent customer of Canadian crude shipped from the U.S. this year, buying cargoes in each of the five months through August, according to U.S. data.

In previous years, Swiss refiners have relied on the former Soviet Union for 60 per cent of its crude supply, the International Energy Agency said. Interestingly, the export point for Swiss-bound oil is listed as Laredo, Tex., a land port on the U.S.-Mexican border.

It is not known yet if the recent downturn in world crude markets is making the practice unprofitable.

"It's probably less so," Mr. King said. "If you can [get the crude to a U.S. port] by pipe you can probably still make money. If you do it by rail, you're probably talking pretty thin margins."

Meanwhile, Suncor Energy Inc. is exporting crude via tankers loaded at Sorel-Tracy, Que., on the St. Lawrence River. Suncor chief executive Steve Williams said last week that the volumes are not large, but key markets for the supply are the U.S. East Coast and Europe, depending on the economics of the day.