Is There Global Demand for Canadian Oil in 2021 and Beyond?

Pipeline Apportionment & Committed Shippers: TMX

As previously mentioned, the Trans Mountain expansion project will be the conduit necessary to allow more Canadian oil to access global markets. Therefore, apportionment on the current pipeline and the amount of expanded capacity accounted for by committed shippers once the project is complete are both indicative of the level of current and future demand for Canadian oil.

What is “apportionment” anyway, you might ask? It’s the term used to describe the amount of demand in excess of current available capacity on a pipeline. Over the past decade, apportionment of Trans Mountain has occurred consistently on a monthly basis. Take a look at the averages for certain time frames below:

Pipeline Apportionment – Trans Mountain

Additionally, about 700,000 barrels per day (bpd) of the TMX’s expanded future capacity of 890,000 bpd has already been accounted for by committed shippers. If it weren’t for the National Energy Board (now the Canadian Energy Regulator) requiring that a portion be reserved for other shippers, even more of Trans Mountain’s expanded capacity would be accounted for as well.

With consistently high apportionment rates over the past decade and shippers already committed to using more than 80 per cent of the project’s future capacity, there’s no doubt that demand for Canadian oil being shipped on the TMX is indeed alive and well.

Major Refiners Interested in Canadian Oil

More indication of strong global demand for Canadian crude is the fact that two major international refiners are either buying our oil or showing a keen interest in doing so:

• In October of 2020, Reliance Industries, one of India’s largest refiners, agreed to purchase 2 million barrels of Canadian heavy oil per month for at least six months

• That same month, Repsol eyed purchasing more than 2 million barrels of Canadian heavy per month over an unspecified time frame. About a year prior, the major Spanish refiner also considered transporting half a million barrels of Alberta oil per month to Montreal before shipping it to Europe

Global buyers like Reliance and Repsol are scrambling to find new sources of heavy oil due to a number of concurrent factors, including:

#1 - The total collapse of Venezuela’s crude production over the past several years

#2 - The escalation of sanctions put on Venezuela by the U.S.

#3 - Mexico’s state-owned petroleum company promising to maximize domestic refinery output which is expected to keep more of the nation’s flagship heavy blend Maya at home

#4 - Gradual output declines coupled with decreasing export volumes in Mexico which are expected to leave a hole on the global market that was once filled by Maya heavy crude

Supply chain instability in Venezuela and Mexico has led these major buyers and others to look for more stable producers for heavy crude supply. It’s no wonder they are now looking to Canada.

💡 The oil consumed in 2040+ is not currently producing today and will be new production requiring Trillions of new investment.

Where should environmental, social and governance conscious consumers and investors be focused?

✅ #Canada should be top of the list. pic.twitter.com/U4ziKNfKUt

— Canada Action (@CanadaAction) December 4, 2020

Ceding Market Share to More Stable Producers, Like Canada

Events like those in Venezuela and Mexico mentioned above are causing major refiners to look towards Canada - a democratic and free country that ranks 1^st on environmental, social, and governance (ESG) metrics of the world’s top 20 oil reserve holders – as a stable source of oil.

To continue, U.S. sanctions on Venezuelan oil combined with limited access to Canadian oil, due primarily to pipeline restraints, increased the demand for Maya in recent years to a point where it was selling at a price that was on par, or even higher than Western Texas Intermediate (WTI) for a majority of 2019. These sanctions didn’t reduce global demand for oil, but rather ceded Venezuelan market share to other producers which in this case was largely Canada.

Mexico also stepped up to fill the void and supply U.S. Gulf Coast refineries with heavy crude. Note that Western Canadian Select (WCS) and Mexican Maya heavy blends are very similar in quality, however, the latter is not landlocked and can be sold on international markets via the Gulf Coast. As a result, Mexico’s Maya commands a larger price per barrel than Canada’s WCS does – reminiscent of the price differential that equates to billions of dollars lost by Canadians on an annual basis.

Global events that are causing instability in oil supply chains are all the more reason for buyers to source their crude from producers like Canada; we offer stability, and our oil and gas sector is world-class when it comes to taking action on climate. In tandem with keen interest by major refiners, these occurrences show that global demand for Canadian oil is strong, even if buyers have to acquire it via U.S. ports.

Who Else Has Been Buying Canadian Oil?

China, India, South Korea, Japan, and Europe. When these global buyers purchase Canadian oil, they often have to ship it through the U.S. Gulf Coast due to a lack of pipeline capacity to tidewater in Canada. For example, the 12 million total barrels bought by Reliance is being shipped to India via the U.S. Gulf Coast. The same would be likely for Repsol.

This isn’t the first time Canada has been forced to ship crude through American ports either. Over the years, several other nations have purchased our oil via the U.S. Gulf Coast, or, through the Port of Vancouver via the existing Trans Mountain pipeline.

Here's several recent purchases of Canadian oil by global buyers:

"Demand from the Asia Pacific has materialized, as so far 3.1mn bl of Cold Lake are estimated on subjects to load at the US Gulf coast in December, with delivery expected in China and India... The last time a Canadian heavy grade was reported as a US Gulf export option was during the October load month, as part of a 2.1mn bl VLCC chartered by Unipec..." - 2020

“Reliance Industries is not alone in shunning Venezuelan oil, fearing repercussions from Washington. India’s second-largest refiner, Nayara Energy, has also stopped buying Venezuelan crude, switching to Canadian, Kuwaiti, and Ecuadorian oil” – 2020

“Canadian and Alaskan crude that normally travels to the U.S. West Coast is finding a market in China, where demand is almost back to pre-pandemic levels.” - 2020

“Thirty-two cargoes with a combined 16 million barrels of Canadian crude loaded in the U.S. Gulf Coast from May until mid-September have been shipped mainly to buyers to China, India, South Korea and Europe…” - 2019

“…more than 130,000 bpd of heavy Canadian crude is scheduled to depart from Texas, four times the average exported in 2018…” – 2019

“Cosmo Oil [Japan] will load around 300,000 barrels of Cold Lake crude, together with about 700,000 barrels of US WTI Midland crude on Suezmax tanker Athens Spirit September 10…” – 2019

“The tanker New Dream… departed on June 16 from Galveston loaded with more than 1 million barrels of heavy Canadian crude, and is headed to Asia… Another 3 million barrels of Canadian crude are due to be exported from the Gulf Coast by June 30…” – 2019

“The tanker Erik Spirit left Burnaby’s Westridge Terminal (the end point of the Trans Mountain pipeline) on April 4, after a two-day loading, and is expected to arrive in Qingdao, China, on April 23... The tanker is likely holding at least 500,000 barrels of Alberta crude, in the form of diluted bitumen.” - 2019

“…7.5 million barrels of Alberta crude shipped to Asia via Westridge Marine Terminal in 2018… The U.S. was the biggest buyer, at 10.7 million barrels... Hibernia oil producers in Newfoundland also sold close to 1 million barrels of heavy crude to China in 2018…” – 2018

“South Korean refiner Hyundai Oilbank Corp has bought its first cargo of Canadian Cold Lake crude oil that will arrive in late April to early May… Hyundai, South Korea’s smallest refiner by capacity, bought 300,000 barrels of the crude” – 2018

The evidence is clear; global demand for Canadian oil is strong. Once the Trans Mountain expansion is built and Canada gains reasonably sized export capacity to tidewater, buyers in China, India, South Korea, California and potentially other parts of Southeast Asia will likely be lining up for our oil, just like some of these nations are currently for Alaskan crude.

Alaska Selling Record Volumes to China

China’s surging appetite for energy is saving Alaskan oil producers from a pandemic-related collapse in demand along the U.S. West Coast. The state is on track to export the most oil it has in 20 years, with volumes more than doubling year-over-year to 15.6 million barrels thus far in 2020.

More than a dozen tankers have left Alaska for Asia since the beginning of the year, carrying approximately 12.3 million barrels to China and another 3.3 million barrels to South Korea. According to Bloomberg, some of these tankers are already making their way back to the export terminal of Valdez located at the end of the Trans Alaskan Pipeline system.

When Alaska can’t sell to the U.S. West Coast, they sell to China and other energy hungry nations because the state has access to tidewater for its oil. Canada needs the same optionality; we need our own pipelines with ample export capacity to the coast so that we don’t have to sell our oil through the U.S.

Like Alaska, Canada has a major advantage over many other oil producing jurisdictions due to its proximity to developing economies in Asia. The nautical distance from the Port of Vancouver to the Port of Guangzhou, for example, is just over 5,800 nautical miles. From the U.S. Gulf Coast, the shortest trip to the same port is nearly double the length, at just under 10,850 nautical miles via the Panama Canal. Mexican or Venezuelan crude exports sent to Chinese buyers, for example, would have to travel similar or much longer nautical distances than tankers shipping from the U.S. Gulf Coast.

Let’s Get Canada in the Game - Oil Analysts See Battle for Asian Market Ahead of Peak Demand.

Peak Demand ≠ End of Oil. https://t.co/dpPsyoBHih

— Pipeline Action (@PipelineAction) December 5, 2020

Canadian heavy oil shipped via tanker from the Port of Vancouver to Asia would have much lower transportation costs on a comparative basis with the shipping of heavy crudes from other locations. Buyers would save some serious cash versus hiring a tanker that would ship from the Gulf Coast and have to travel through the Panama Canal, around Cape Horn or the Cape of Good Hope to get to its destination.

The distance between Alaska’s Port Valdez and Guangzhou is under 5,000 nautical miles. Is it just a coincidence that China is currently snatching up record volumes of Alaskan crude?

Asian Heavy Oil Refining Capacity is Growing Rapidly

Historically, U.S. Midwest and Gulf Coast refineries built for Canadian oil have accounted for the lion’s share of our heavy exports. But now, heavy refining capacity in Asia is on the rise. Between 2009 and 2018, global demand for heavy oil in Asia grew by 10 per cent.

Global Heavy Oil Demand, 2009 & 2018 - IHS Markit

With many new refineries in Asia optimized to process heavy and sour crudes, there is no shortage of demand for heavy oil in the region. Today, statistics show that Asian refineries can refine more than eight times the daily export capacity of the Trans Mountain expansion via Westridge Marine Terminal.

If only these buyers could access heavy crude without being “stuck between a rock and a hard place” multiple times over – i.e., U.S. sanctions on Venezuela and Iran, OPEC-mandated cuts, dwindling supply in Mexico, and so on and so forth. If only there was a stable and environmentally responsible country like Canada that could supply the global market with some of the heavy oil it needs?!

California Oil Demand & Transportation Costs

China, India, South Korea, Washington, and California have all been listed as the most probable buyers of oil shipped on the TMX. Like many refineries in Asia, Californian refineries are also well set up to refine heavy crudes, much of which has been supplied by Alaska and California over the years.

What many people don’t understand about states like Washington or California is that they are not interconnected to the rest of the U.S. by pipelines. The west coast states, Nevada, Arizona, Alaska and Hawaii are all part of PADD 5; if this region of the U.S. isn’t supplying its own oil demand, then it must import it via tanker from elsewhere or by railcar from other states and countries.

California Oil Imports by Tanker 2018 – California Energy Commission

California gets around 3 to 4 per cent of its total foreign oil imports via tanker from Canada each year. Notice the different suppliers in the chart above and then think about the distance between them and the “Golden State.” Those are some lengthy (and costly) ocean voyages to say the least!

Consider the distance between the Port of Vancouver and the Port of Los Angeles, for example, which works out to be just over 1,150 nautical miles. A trip from the Port of Basra in Iraq – a nation with large heavy oil reserves – to the same U.S. port turns out to be over 11,560 nautical miles.

On transportation costs alone, it’s likely that California will be able to outbid buyers in China and other parts of the world for some of the Canadian oil available via the TMX. And the best part is that California will be paying world market prices because Canada will now have the optionality of selling to other energy hungry markets in China and elsewhere.

Who will pay the best price? We should all not be surprised if Canadian oil starts to command a premium from international buyers much like Mexican Maya has over the past few years as U.S. sanctions on Venezuela played out. Eliminating the current oil discount on WCS would save our country from losing billions of dollars each year!

What About Future Global Oil Demand?

Critics of the Trans Mountain expansion argue that global demand for oil has now peaked, or that we won’t need oil for much longer as we make the transition to a lower-carbon world. Let’s take a look at some of the most recent energy reports released by major organizations to get caught up to speed on that false notion:

• Oil demand is projected to recover from its historic drop in 2020, edging ahead of pre-crisis levels by 2023
  
• Oil demand in emerging market and developing economies is projected to grow to 60.1 million barrels per day in 2040, up from 46.4 million in 2019
• By 2040, oil demand in Asia is expected to rise by 25% (9 million barrels a day) to nearly 45 million barrels a day vs. 2019 levels
• China’s oil demand is projected to grow to 15.1 million barrels per day by 2030, up from 13.2 million in 2019
• India’s oil demand is projected to grow to 7.1 million barrels per day by 2030, up from 5 million in 2019
• Global oil demand is projected to increase from 97.9 million barrels per day in 2019 up to 104.1 million barrels per day by 2040
• $390 billion in annual investment is still needed in upstream oil projects despite not much growth projected past 2030, mainly to offset output declines

Sources: IEA World Energy Outlook 2020, S&P Global Platts, Wood Mackenzie

The bottom line is that global demand for oil and gas isn’t going anywhere anytime soon. Once we do hit peak oil sometime in the distant future, it’s not like demand drops to zero either! It will be more like a gradual tapering off for decades until the world has made a full transition away from fossil fuels to other forms of energy - if that's ever possible.

As one of the most transparent, regulated and environmentally conscious global oil producers, Canada should be the last one “out of the pool.” And because the TMX is one of the only pipeline projects connected to North America’s west coast, the chances of it also being one of the last pipelines “out of the pool” is very high.

Who Benefits by Cutting Off Canadian Access to Global Markets?

For anyone who says otherwise despite the overwhelming evidence of strong global demand for our oil, we really should be asking who stands to gain by shutting down Canadian access to global markets? Other global oil producers, of course!

U.S. economic sanctions on Venezuela and Iran only ceded market share to other oil producers such as Saudi Arabia, Iraq, and Nigeria, all of whom score much lower on environmental, social, and governance rankings than Canada. Dwindling supply and domestic refining initiatives in Mexico also may cause market share to cede to other nations if Canada doesn’t step up to the plate!

Cutting off access for Canadian oil to global markets (other than the U.S.) by not completing the TMX would be comparable to shooting ourselves in the foot before going to run a marathon – it just doesn’t make sense if we want to place 1^st in the race and support our hard-working coaches (Canadian families) and future training (Canadian prosperity) with our winnings.

Not completing the TMX would also be disastrous for taking action on climate and supporting / upholding democracy, equality, human rights around the world in general; a large majority of global producers who would account for market share to be gained by TMX have abysmal records on all of the above.

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— Oil Sands Action (@OilsandsAction) December 2, 2020

The next time someone tells you there isn’t global demand for Canadian oil, we encourage you to take a step back and evaluate such statements for yourself. Or, maybe even let them know a few facts about what you’ve learned. It’s critical that we have balanced and informed discussions about our job-creating, wealth-generating natural resource sectors in a world where raw materials are essentially the key to prosperity and the backbone of our contemporary lifestyle.

The evidence above clearly indicates that global demand for Canadian oil is alive and well. As one of the most environmentally responsible oil and gas producers on the planet with top scores on ESG metrics versus the world’s top reserve holders, we should be a global provider of choice. Don’t you agree?!

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