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Simplified: Canada’s complicated relationship with oil

PortandTerminal.com, June 20. 2019

Canada is the 4th largest producer of oil in the world. But it has two very big problems with its oil. Distance and type.

On paper, Canada could become energy self-sufficient tomorrow. Every day it produces 4.2 million barrels of oil and only uses less than 2 million barrels. Canada has the world’s third-largest oil reserves. Venezuela is first and Saudi Arabia is second.

Canada has two oil problems though. The first is that its oil is located in the western part of the country far away from where most of its population lives.

The distance between western Canada’s oil fields and its main domestic market in the east is more than 3,000 km. For perspective, that’s 500 km greater than the distance between London, England and Istanbul, Turkey.

Because of the vast distance involved, there is no oil pipeline between western Canada and its eastern provinces.

The second problem oil problem that Canada has is the type of oil that it produces.

Most of Canada’s oil reserves are found in its oil sands located in Alberta. The oil is locked up sand and rock so it’s expensive to extract. Once it is extracted it produces a heavy oil called Western Canadian Select (WCS).

Massive trucks filled with oil sand

Western Canadian Select is considered to be of lower quality compared with the benchmark oil called West Texas Intermediate (WTI), a lighter grade of oil that is easier to refine. As a consequence, Western Canadian Select (WCS) sells at about a 30% discount versus West Texas Intermediate.

The oil sands accounted for 64% of Canada’s oil production in 2017 or 2.7 million barrels per day.

Canadian oil sells at a steep discount vs the benchmark West Texas Intermediate (WTI) oil

Canadian oil imports

Canada’s largest oil refinery is the Irving Oil refinery on the Atlantic east coast. Photo: Irving Oil’s “Acadian” oil tanker at the company’s loading docks in Saint John, New Brunswick

Canada imports around one barrel of crude oil for every seven and a half barrels that it produces.

Because Canada’s domestic oil production is located far away and is of a heavier grade, Canada’s eastern refineries end up importing from abroad much of the oil that they need.

The largest oil refinery in Canada is the Irving Refinery in New Brunswick, located on Canada’s east coast. The refinery is not connected to a pipeline. All of its crude feedstock is brought in by sea tanker or rail. Most of the oil imported on Canada’s east coast comes from Saudi Arabia.

The largest oil refinery in Canada is the Irving Refinery in New Brunswick, located on Canada’s east coast

Overall though, America is by far the largest source of Canadian oil imports followed by Saudia Arabia.

Source: National Energy Board (NEB) of Canada

Canadian oil exports

Crude oil, and other petroleum products, is transported in rail tanker cars on a Canadian Pacific Railway (CPR) train near Medicine Hat, Alberta, Canada on Thurs., Sept. 6, 2018.

As we saw earlier, every day Canada produces about 4.2 million barrels of oil and uses less than 2 million barrels. That leaves a lot of oil left lying around for export, most of which is the heavier grade of oil called Western Canadian Select (WCS).

Thanks to all of this oil, Canada is the fourth largest producer and fourth largest exporter of oil in the world.

Because the bulk of Canadian oil is produced in the landlocked area of the country in the west, almost all (99%) of the country’s oil exports are shipped south to the United States by pipeline and rail.

Bargaining position

The debate over the pipeline expansion has been bitter and has divided many in the country on both sides of the issue.

Canadian oil exports to the United States account for almost all of Canada’s total oil exports but only 22% of American oil imports. That leaves Canada in a weak bargaining position.

Without a way to get its oil to the sea so that it can export it to other buyers by sea, Canadian oil exporters in the west are in a relatively weak position when they negotiate with their American buyers.

It is for this reason that many in Canada have wanted to expand the country’s ability to ship more of its oil by pipeline to the west coast where it can be loading onto tankers and shipped to other global buyers.

After much debate, controversy and a multi-billion dollar government buyout of Kinder Morgan’s stake in the project, the Canadian government announced this week that it had approved the Trans Mountain Pipeline expansion citing the national importance of the project for Canadians.

The pipeline expansion will build a second pipeline stretching some 1,000 kilometres (600 miles), from Canada’s landlocked western oil fields to a marine terminal on its Pacific Coast. The pipeline will almost triple the export capacity of the existing pipeline, which the Canadian government bought for $4.5 billion from Kinder Morgan last year.

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