Tightness in USGC heavy crude puts spotlight on Canadian access

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Jeff Mower:

Hello and welcome to the Oil Markets Podcast by S&P Global Commodity Insights, where today we will be discussing heavy oil supply tightness in the US Gulf Coast, and some plans to bring more Canadian barrels into that region and elsewhere.

I am Jeff Mower, Director of Americas Oil News, and I'm joined today by senior upstream crude editor Ashok Dutta and Canadian oil markets editor, Alex Saucer. Gulf Coast heavy oil supplies have tightened largely due to a drop in imports from Mexico and Venezuela. S&P Global Commodity Insights at Sea data shows the US importing around 19 million barrels of waterborne heavy crude so far in July. That's down from around 26 million barrels in June, and 32 million barrels in May.

Imports from Mexico have fallen to roughly 5 million barrels so far in July, and that was from 9.3 million barrels in June. Pre-COVID, the US was regularly importing around 20 million barrels or more per month from Mexico. Meanwhile, zero imports of Venezuelan crude have been delivered to the US in July, down from around 3.9 million barrels in May.

And I should note that as we're recording this, it's very late in July, so those numbers could change as more barrels arrive. But so far, it's looking pretty tight. And meanwhile, recent wildfires in Western Canada have cut the volumes of Canadian heavy crudes available for US Gulf refiners. So, this supply tightness was noted by Valero in its second quarter earnings call recently.

Valero owns and operates several refineries in the Gulf Coast and regularly processes heavy crudes. Valero's CEO, Gary Simmons noted the lack of Venezuelan and Mexican crudes, the Canadian wildfires and some quality issues impacting the offshore medium, sour Mars crude. Simmons expects additional heavy supplies by the fourth quarter as OPEC unwinds its 1.9 million barrel a day cuts in August, and Canadian production recovers.

And Simmons made those comments just as the Trump administration was said to be allowing Chevron to resume its operations in Venezuela. Now, that could allow more Venezuelan heavy crude back into the US Gulf Coast. But Mexico is a longer-term problem and really so is Venezuela, right? So, it's got us thinking about heavy oil supply security really on both sides of the border.

So, what is keeping US Gulf refiners from just replacing those waterborne heavy crudes with barrels piped down from Canada? Ashok, I want to start with you just on the current pipeline situation, or maybe start with the planned pipeline expansion, the Southern Illinois Connector. Maybe if you could explain what's going on there.

Ashok Dutta:

Sure, Jeff. So, Enbridge is right now in the midst of an open season, which started in kind of midweek of July, 18th July, and it's going to end on the 8th of August. They are looking at moving another 200,000 barrels a day of the heavy crude on this pipeline. They are partnering with Energy Transfer, so they would take these barrels more from the Midwest, so Wood River. And then, push it down south.

So, that's the pipeline thing that is underway through an open season. And once that open season closes, they're going to get, obviously with the market trends going to get a good interest in terms of shipper response.

Jeff Mower:

Yeah, it seems like, I mean, when you look at the current pipeline access to the Gulf Coast, what do we have? We have three main lines, correct?

Ashok Dutta:

Correct. So, Enbridge has got the main line system which has been running, and they have always said that we will run that pipeline at just above 3 million. So, at the last quarter earnings goal they mentioned, they were touching 3.1, 3.2 million barrels. And they have an open season that's already underway to take more barrels through the Seaway System from the Midwest to the US Gulf Coast. So, that's the first pipeline that goes from the WCSP, more popularly known as the Western Canadian Sedimentary Basin.

Jeff Mower:

That's right. And you had written... I'm sorry, you had written that that was apportioned for August. So, that main line is scheduled above capacity.

Ashok Dutta:

Yes, Jeff. It's higher than normal. It's 5% for lights and four for heavies. How much higher is it? It's usually 3% and 2%. And this time around, it's 4% and 5%. So, some barrels are competing to be loaded on this main line.

Jeff Mower:

And then, we have the Keystone.

Ashok Dutta:

Yes. Then, we have the Keystone, which runs at around 650 of a nameplate capacity. They also are having an open season of adding anything between 30 to 35. That's what the market is telling us.

Jeff Mower:

Oh, interesting.

Ashok Dutta:

And then, lastly, you have the TMX system, which I include the Legacy 300, and they expanded 590. So, a total of 890. But interestingly, it has not gotten into any apportionment.

Jeff Mower:

Yeah, although that really, I probably... I think I misspoke about because that really takes crude out to the West Coast, right?

Ashok Dutta:

Correct, correct.

Jeff Mower:

Yeah, it doesn't really bring it down to the Gulf. So, and if anything that, is that removing some of the Canadian crude that could be brought down to the Gulf Coast?

Ashok Dutta:

Absolutely. Increasing volumes of heavy crude are moving on that line. A little bit of a shift from last May when this pipeline was opened up. Lighter volumes were also going in a mix of kind of 35, 65. But now if you see those volumes, it's the heavy volumes which are dominating.

Jeff Mower:

I guess I'm curious about, here's some, Alex, you can address. It's like the economics of exporting crude from Canada to the Gulf Coast. If supplies are tight down there, why not just bid it up, right? And you're competing with those customers on TMX and you just bring more of that crude down to the Gulf?

Alexander Saucer:

Well, one of the issues with bidding it up is the primary buyer on the Gulf Coast is, or one of the primary buyers has generally been China, and they're just buying barrels off of TMX now. So, as you point out, a lot of barrels that would have been going the Gulf Coast, especially for re-exports, have really just been flowing on TMX over to China. If you look at the data, we've really seen that's kind of just where those missing Gulf Coast barrels are going for the most part is, if you look at the data, China kind of disappears from the re-export market right when TMX comes online.

Jeff Mower:

I see. Yeah, and when you look at the prices, right, and correct me if I'm wrong, like Latin grades are stronger, right? As far as the heavy crudes go?

Alexander Saucer:

That's correct.

Jeff Mower:

Yeah, like Vasconia has jumped, right? The sort of price differential to WTI. But Canadian crude isn't necessarily stronger. Am I right in saying that?

Alexander Saucer:

I don't necessarily think that's correct. We've seen both Pacific Cold Lake and Pacific Dilbit, which is what we call both the two primary TMX heavy grades. We've really seen them since TMX has come online, strengthen against Latin American crude. I believe both grades are now trading a premium to not only NAPO, but also Oriente. So, Canadian heavy grades have really strengthened versus Latin American heavy grades in the last six months to a year.

Jeff Mower:

I got you. So, over a longer term?

Alexander Saucer:

Yeah.

Jeff Mower:

Yeah. And not just sort of this, yeah.

Alexander Saucer:

Sorry. I believe you saw Oriente move to a discount to the TMX grades back in May of this year. So, it's been in the last couple of months.

Jeff Mower:

Not just sort of this recent surge. Are you seeing more Canadian crude? I mean, we are seeing Canadian crude come back from the wildfires, right?

Alexander Saucer:

Yes. So, we were told that production should have been back to normal or close normal back in mid-June to early July. So, our expectation is that preparation has come back aligned. And we've seen differential rates really come down for Western Canadian select at Hardisty that would reflect production returning.

During the wildfire high, we saw it get as high as an $8.70 cents per barrel discount to the WTI, CMA back on May 31st in our last assessment had an $11.55 cents per barrel discount. So, that really just shows that production is coming back from those outages.

Jeff Mower:

Yeah, there's something else on the Canadian crew to the Gulf Coast angle I thought was interesting. And that was, Ashok, we were talking earlier today about Gibson. Explain to our listeners what Gibson is doing on rail loading.

Ashok Dutta:

So, Gibson has, if I may use the word legacy, legacy in the sense that if you remember the good old days of 1998 to 2000 when you had crew by rail becoming from Western Canada becoming quite a significant thing.

So, crew by rail has dwindled obviously because more pipeline capacity is now being offered, and also the economics of loading barrels into rail cars are to go back specifically to Gibson. They said that they have got a new customer in another heavy oil producer called Strathcona Resources as a customer for loading heavy oil from their facility in Hardisty, which is right in the midst of where they have all the tank pitches.

So, this is a diluent recovery. It's not just through by rail, but also offering a DRU, a Diluent Recovery Unit, which basically means that they load these barrels onto rail cars and then whatever diluent is used to kind of lighten the heavy barrels is recovered. So, they have a new customer that has come in. And that simply tells us that there is a push for Western producers to move more barrels to the Gulf Coast.

Jeff Mower:

And move more barrels to the Gulf Coast by rail.

Ashok Dutta:

Yeah, exactly.

Jeff Mower:

Right. And that I find very interesting. So, one thing before I just want to back up real quick just to explain to our listeners like, explain the use of diluent. What are we using? Or what are the producers using or shippers using as diluent? And why is that necessary?

Ashok Dutta:

So, because of the heaviness of the Western Canadian barrels to meet transportation specifications because of the thickness of it, you liken it or you dilute it, and therefore the word diluent comes from there with an agents, particularly like pentane, a case in point which WCSB producers use very happily because it's available here.

So, they use that pentane to lighten those barrels and move it either through pipelines or otherwise. Although, diluent is more useful when it comes to pipelines that will by rail, but yet if a producer gets an option of getting back the value of the diluents or the diluents by itself, that does add. So, although sending through rail cars are a little bit more expensive and they have to be economically feasible for a producer, but if they have a shipper or you have a midstream company telling you, I'm going to return some of the money that you are spending, that's actually helpful.

Jeff Mower:

Yeah, that is interesting. I mean, it got me thinking about the economics again, of moving crude by rail. I mean, I haven't looked recently what our expectations are on rail figures. But when you look at that spread, right, I know Alex, like the spread between, what do you look at WCS and the Gulf Coast at Nederland, right?

Alexander Saucer:

Correct.

Jeff Mower:

This sort of premium to Hardisty.

Alexander Saucer:

That's correct.

Jeff Mower:

And right now, it doesn't appear to be something that would work for rail.

Alexander Saucer:

Alexander Saucer We've been seeing very tight spreads between WCS and Nederland recently, just in the general strengthening of heavy markets. It has led to some tight spread, which also makes the economics from getting down to the Gulf Coast slightly complicated, especially on rail.

Jeff Mower:

Yeah, yeah. Essentially when you look at, I was looking at some old data like right now, the spreads like 13 bucks or something. But back in 2022, if you remember back then, the spread had widened to like $27 or $38 and we saw a lot more, a lot more crude moving by rail down there, made much more sense.

But I think there's an issue too with, at least in the recent past with railroads themselves just wanting to term up deliveries, right? It's like it's very hard for them to dedicate cars on a spot basis.

Alexander Saucer:

Yeah, that's right.

Jeff Mower:

And it's hard to term it up because of the spread, because of the volatile price spreads.

Ashok Dutta:

But Jeff, these rail cars are old workhorses. So, anytime a producer comes, they are available. If I have barrels that I want to move to market and not necessarily put it in storage, whether I want to move it to a hub or I want to take it directly to a refinery, if the question comes, "How do I move it?" It's easily available. There is no apportionment. There are no dealers.

So, I presume they work out a package in which they go for it. Like this heavy oil producer Strathcona that Gibson Energy spoke about this month. They have expansions of becoming big and they have been using one terminal in Saskatchewan to move those barrels. But now, they have come into the heart of Western Canada's crude by rail, which is Hardisty, and they have thrown their hat into the ring.

Jeff Mower:

Yeah, yeah. Look at the segue, speaking of Saskatchewan, let's talk about this planned pipeline to move Canadian crude to the East Coast. So, they joined... How about Ashok? You discussed this. They joined Alberta and Ontario recently, right? On an MOU to build this crude pipeline. What can you tell us about that? How realistic do you think that is?

Ashok Dutta:

So, that was early July. Ontario and Alberta signed a pipeline. They're kind of flaky on the details. It was an MOU to build a pipeline. The MOU did not necessarily specify any particular capacity. But having said that, I think the more significant point to note is they are talking in terms of energy dependence, and Ontario is kind of doing a due diligence that the crew that Ontario receives, Western Canadian crew, those barrels go down south, and then they go up and bridges Line 5 and enter from Michigan.

So, they just feel, why don't we have a pipeline straight coming from Alberta to Ontario? Is that a new thought? No, there was the Energy East Pipeline, Jeff, that you would remember. But Energy East had problems because if you entered Quebec, there were issues that were there. So, they said, "Let's sign an MOU." And then, Saskatchewan joined the bandwagon saying, "We are also looking at producing more barrels. We are looking at reaching out to new markets. We will be putting our hands to the wheel on that."

So, they have this MOU that has been signed. And I particularly feel the issue is more than the pipeline, Jeff, they want to build that export port in Hudson's Bay.

Jeff Mower:

Oh, that's right.

Ashok Dutta:

That's the Arctic.

Jeff Mower:

Yeah.

Ashok Dutta:

So, it's a kind of known or unknown. There are more unknowns than knowns. And at this point of time, the only existing commodity port in the Arctic is the Port of Churchill, which is in Manitoba, which is a neighboring province of Saskatchewan. So, my gut feeling, you will see sooner than later, Manitoba coming on and joining the bandwagon and saying, "Let's open up an export route from the Arctic."

Jeff Mower:

So, the idea would be, is this close to James Bay?

Ashok Dutta:

Correct.

Jeff Mower:

So, that's the planned port, right?

Ashok Dutta:

Yup.

Jeff Mower:

Yeah, for the oil pipeline.

Ashok Dutta:

Yeah, but all of this is very cost intensive.

Jeff Mower:

Mm-hmm. But it's interesting because the Arctic, I mean, that would allow assuming the ice continues to melt, it's sort of like how much of this is rooted on or based on the expectation that you're going to see increased warming in the, right?

Ashok Dutta:

Yeah.

Jeff Mower:

In Arctic. And that this could, right now it would be a very seasonal port. Is that correct?

Ashok Dutta:

That is right, Jeff. Right now, the Port of Churchill right now operates only for three months.

Jeff Mower:

Yeah.

Ashok Dutta:

So, that should tell you. And if you want fully operational, you would need those icebreakers. At this point of time, Russia and China have those icebreakers.

Jeff Mower:

Yeah.

Ashok Dutta:

I don't think Canada has got the wherewithal for that kind of a thing as yet.

Jeff Mower:

Yes. But it would open up, it would reduce the travel time, right? Reduce the transit time to say Europe...

Ashok Dutta:

Yeah.

Jeff Mower:

... as far as bringing Canadian crew to Europe.

Ashok Dutta:

Yeah.

Jeff Mower:

That's interesting.

Ashok Dutta:

Yeah. I mean, you can sit on any Arctic port and grab a piece of pencil and draw whatever routes you want to. The question is, you've got to get through the ice.

Jeff Mower:

Yeah. Wow. Yeah, that's fascinating. We'll see. There's also a proposed pipeline, another proposed pipeline to the West Coast that's say to Prince Rupert.

Ashok Dutta:

Correct.

Jeff Mower:

Right. On the West Coast. What's going on with that one?

Ashok Dutta:

So, with Prince Rupert, the Alberta government feels more confident. They have come out and set that the capacity of that pipeline would be 1 million barrels a day. And as a sign of its support for it, the Alberta government is willing to commit up to 300,000 or 33% of throughput to kickstart that project.

So, that would take barrels from the WCSP to the Pacific Coast, and that's another one. Now, a point here to note, Jeff, is that TMX barrels cannot be loaded on VLCC because of draft restrictions. Would those be taken care of? No, it's going to be very difficult because right where the loading dock for TMX is, that's right in the heart of the port of Metro Vancouver. But the advantage with Prince Rupert is you could load VLCCs.

Jeff Mower:

Mm-hmm. And now, you've written that the onus of building these new lines would depend on the private sector, right? I mean, that's what these people like, I think Danielle Smith and others have said. But I guess, can these pipeline companies, can the private sector depend on the sort of regulatory certainty? I mean, the TC Energy, when they proposed to Energy East back in 2013, they finally withdrew it like four years later because of these regulatory issues, right? Will Mark Carney, new prime minister, will he provide that sort of certainty? What does the market think?

Ashok Dutta:

So, Mark Carney got elected at the end of May, and so far, if you see in the last three months, he certainly has made a progress with Bill C-5, which actually has been legislated. So, he's got the powers, it's done and dusted. He has the ability to pick up a project and declare it of national importance.

He has talked about shortening the regulatory approval process to two years, and this is compared with the existing or the previous regime, which usually took anything up to six to eight years to approve. He has shortened it. He has said two years. The industry is actually now waiting for him to come up and say, "All right, give me your bucket list and I will say this pipeline is ready for approval." When they get that, then you have a proponent which will come to the table and can build it.

Jeff Mower:

Yeah, very similar to the approach or the promises Trump is making, right? To clear up some of those hurdles and get projects built more quickly. I think especially following the whole Keystone XL project, which went on for like 10 years before it was finally canceled.

Ashok Dutta:

Yeah, exactly.

Jeff Mower:

Yeah. Any serious talk? I remember when Trump has mentioned a couple of times maybe Danielle Smith about reviving Keystone XL. Would it be Keystone Double XL this time? Any serious talk on that?

Ashok Dutta:

I mean, the question would be even if you talk in terms, so Keystone Double XL or Keystone XL, who we were looking at what another 700,000 to 800,000, that's just been so old now. That's the figure that I have in mind. But Jeff, the question is, do you need another million or 700-to-1-million-barrel pipeline from Western Canada to the Gulf Coast?

Jeff Mower:

You will, you will. I don't know. It's like, think of that. It's funny, I'm sure I've mentioned this on podcast before, but I love it when I find an old issue of oil gram news from the 1960s, and there's a story in there about Canadian producers complaining about the lack of pipeline access, right? We need to build more pipelines. It's an ongoing situation here, yeah.

Ashok Dutta:

I mean, production profile coming out of the Permian, what does that mean for Western Canada? How does those barrels move? I don't know, Jeff, as yet. The final word hasn't been written, has it?

Western Canada, Danielle Smith, the premier of Alberta, has always been ready to build another pipeline. I mean, she's always said that we will go West, East, and South. And now, we are going to make an effort to go even north. So, that simply says what Alex was saying, that more and more barrels are going to be produced and these barrels will seek markets. And we do see that.

Alex mentioned about the wildfire, so I think it was around 300,000-hour estimate. Those barrels are back another 100 to 150, the annual seasonal maintenance. This time in the summer, those barrels are back. So, 400,000 to 450,000 barrels are back in a short time of what, possibly 75 days. And they are seeking markets.

And by the end of the year, producers like Imperials and Novus and CNR, Canadian Natural Resources, they are also completing their bite sized oil sands expansions. So, Canadian production is consistently inching forward even at 45 WTI.

Jeff Mower:

Mm-hmm. Alex, as far as the other crudes currently getting a boost from the shortage of heavy crudes, is it mostly Latin American crudes, and are you still seeing that? Are you still seeing that interest in those Latin grades?

Alexander Saucer:

We are still seeing this interest. It's kind of been with this boost, all heavy grades have really been lifted up by the tightness of this market, and we've continued to see South America's strength, and it's just really a fact that strong Asian demand for barrels has really been driving it and really helped put a floor on where differentials can go. Having access to the sea through TMX has really helped ease fears of oversupply or lack of pipeline transport capacity. So, these new pipelines should really help to continue as Canada looks to diversify the markets to which they sell their crude.

Jeff Mower:

Mm-hmm. Well, we will continue to cover all of these developments. It's fascinating. It's a fascinating story. Like I said, it's been going on a long time and looks like it's going to continue going on for a long time. So, thank you very much, Ashok and Alex for joining me. And thank you to our listeners for tuning in. This Oil Markets episode was produced by Jennifer Pedrick in Houston.