By Vipal Monga and Rebecca Elliott
U.S. sanctions on Venezuela have American refiners scrambling to
find new sources for the dense crude oil they need to make fuel,
but Canadian producers are finding the opportunity too expensive to
exploit.
The U.S.'s northern neighbor, the world's fourth-largest oil
producer, would be a natural candidate to make up for the loss of
Venezuelan supply. But much of Canada's heavy crude is landlocked
because of a shortage of pipeline capacity.
Canadian producers have been getting around the pipeline
bottlenecks by using trains to carry more crude to the U.S., moving
an average of more than 320,000 barrels into the U.S. daily as of
November, according to the Energy Information Administration. But
recent data suggest Canada-to-U.S. rail shipments -- which cost
more than moving oil through pipelines -- are now decreasing
sharply because they aren't economically viable at current oil
prices.
The lack of transport options means Canadian producers can't
easily meet the needs of refineries on the U.S. Gulf Coast now cut
off from Venezuelan crude.
"For them to really capitalize on the market gap that is left
with Venezuela is extremely difficult," said Clara McGrail, an
energy consultant for FTI Consulting Inc.
While U.S. oil production is at record highs, hitting 11.9
million barrels a day in November, according to the EIA, America
still imported on average about 7.9 million barrels of oil daily
that month, of which roughly 500,000 barrels a day came from
Venezuela.
The U.S., which mostly produces light crude, needs the heavier
varieties of oil found in places such as Venezuela, Canada and
Saudi Arabia because many domestic refineries are designed to
process a mix of oils. U.S. sanctions have threatened the supply of
heavy crude, making that type of oil more expensive.
That hurts refiners and could eventually cause U.S. fuel prices
to rise for everything from gasoline to diesel to jet fuel, though
high gasoline inventories likely will blunt the impact on
consumers. Gasoline and diesel prices have increased by less than
1% since the U.S. announced the sanctions on Venezuela last month,
according to the EIA.
Moving crude to the U.S. was an attractive prospect last fall,
when heavy crude was selling locally in Canada for more than $50 a
barrel below U.S. benchmark prices because of the pipeline
constraints. However, the province of Alberta, fearful that low
local prices would destabilize local producers, invoked rarely used
legislative powers to curtail oil production in December to rein in
growing crude inventories. While the curtailment propped up the
price of Canadian crude, it also reduced the economic incentive to
send crude to the U.S. by rail by narrowing the price
disparity.
Transporting a barrel from Canada to the U.S. Gulf Coast costs
about $20 by rail, compared with about $12.50 by pipeline,
according to energy investment bank Tudor, Pickering, Holt &
Co. That shipping cost exceeds the current difference between U.S.
and Canadian benchmark crude prices, which was at $10.70 a barrel
Wednesday afternoon, according to RBC Capital Markets.
Imperial Oil, a Canadian oil sands producer controlled by Exxon
Mobil Corp., cut its rail shipments this month. The company now
expects shipments from its Edmonton rail loading facility to stop
entirely in February. In December, it averaged 168,000 barrels a
day.
Richard Kruger, Imperial's chief executive, said Alberta's
market intervention had caused prices to jump too high, making
train shipping uneconomical. In comments to analysts, he called the
curtailment order "ill-informed."
A spokesman for Alberta's energy department noted that the
province recently eased the curtailment and left open the
possibility of further easing, adding, "While we're not out of the
woods yet, this temporary measure is working."
Suncor Energy Inc. also has canceled plans to ship more than
20,000 barrels a day in recent weeks, while Canadian National
Railway Co., one of Canada's two large train operators, has had to
idle trains because of lack of demand, people familiar with the
matter said.
A Suncor spokeswoman declined to comment, but Chief Executive
Steve Williams told investors last week that Canadian producers are
finding it difficult to justify moving crude by rail because
Canadian oil has become more expensive.
"A lot of the rail movements are stopping, or have stopped," Mr.
Williams said. But, he added, "demand is increasing."
Not all producers are cutting train shipments. Calgary-based
Cenovus Energy Inc. plans to increase its rail exports from roughly
20,000 barrels a day to 100,000 by year end, said CEO Alex
Pourbaix. He is counting on Canadian oil selling at a bigger
discount to U.S. benchmarks later this year. "We'll be in the money
in the second half of the year," he said.
Marathon Petroleum Corp., the largest U.S. refiner by capacity,
imported a small amount of Venezuelan crude last year. Last week,
it told investors that it had moved away from using the country's
oil, with replacement supplies coming primarily from the Middle
East and elsewhere in Latin America.
Refiner Phillips 66 told investors Friday that it sees limits to
how much heavy crude Canada can provide because of the cost of
transporting crude by rail.
"We are seeing a reduced utilization of rail as we come into
February," said Jeff Dietert, a vice president. "Those economics
are closed."
Recent data reveals the drop-off in crude-by-rail shipments.
Storage terminals in Western Canada loaded an average of 156,000
barrels per day onto trains for the week ended Feb. 1, according to
research firm Genscape Inc., less than half the average for the
week ending Jan. 11.
Oil train shipments could rebound if Alberta further eases
production cuts, which likely would send Canadian crude prices
lower and prompt companies to transport more crude by rail. Even
then, however, analysts said it is unlikely Canada would be able to
quickly ramp up exports to the U.S. because of constraints such as
securing enough additional railcars.
"It's not clear Canada will be able to take advantage," said
Michael Tran, global energy analyst with RBC Capital Markets.
Write to Vipal Monga at vipal.monga@wsj.com and Rebecca Elliott
at rebecca.elliott@wsj.com
(END) Dow Jones Newswires
February 14, 2019 07:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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