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Canadian crude: time for new approach to market access

Chris FreimondComment
 Pipelines, like those constructed by Spectra Energy (top), are the type of infrastructure that’s crucial to Canada’s oil export efforts, say Energy Roundtable president Jason Langrish (bottom left) and Barry Munro, leader of the oil and gas practice at EY in Canada. Spectra; Michelle Siu; EY

Pipelines, like those constructed by Spectra Energy (top), are the type of infrastructure that’s crucial to Canada’s oil export efforts, say Energy Roundtable president Jason Langrish (bottom left) and Barry Munro, leader of the oil and gas practice at EY in Canada. Spectra; Michelle Siu; EY

By Chris Freimond, Managing Editor

In one of his first media interviews after taking office, Alberta’s new premier, Jim Prentice, said he was giving high priority to finding new markets for his province’s oil and warned that Canada faced profound economic repercussions unless pipelines were built to open up new trade routes.

He also acknowledged that a new approach by his government to climate change was a key factor in altering the negative global public perception of Alberta’s oil.
That was good news to Jason Langrish, president of the Energy Roundtable who believes Canada needs to recognize that other jurisdictions have a political problem in accepting Canadian oil and that we must do something to address that.

“We need to give to get,” says Mr. Langrish. “In particular, we need to do something to enhance the environmental profile of Canadian oil sands crude. This could mean changes to greenhouse gas policies, or it could simply mean doing a better job of communicating the efforts that have been made so far.”

But with pipeline capacity already near peak and plans to build new pipelines bogged down by political protest in the U.S. and community opposition in parts of Canada, getting Alberta’s oil to market is far more than just an infrastructure challenge. Taking steps to address valid public concerns is equally important, as is making sure that the public is fully aware of the steps that have been taken so far.

Barry Munro, leader of the oil and gas practice at EY in Canada, has just completed a cross-Canada tour of speaking and consulting engagements and says he is “pretty impressed” by what the energy sector has done in the past couple of years to address market access issues, and adds that he is optimistic about the future of the industry.

“In the face of adversity, people turn to innovative solutions,” says Mr. Munro. “They range from the boom in oil by rail, which, while raising concerns of its own, has in some ways fundamentally changed the energy dynamic, to shipping Canadian oil to Europe via the U.S. Gulf coast as Suncor did recently.”

For a long time, he adds, energy companies were logistically competent, but relatively rudimentary at marketing their product.

“They produced it and it went into the pipeline, and they didn’t think about the pipeline and markets. Now we are seeing on both the oil and natural gas side quite a bit more sophistication building up,” says Mr. Munro.

However, he believes Canada still needs to engage in a more effective countrywide conversation around energy and how we maximize our energy resources.

“That means better ways to get our pipeline and infrastructure approved and, at the end of the day, finding ways to access Asian markets, one way or the other. The answer to every pipeline project can’t be no,” adds Mr. Munro.

Alternatives to simply exporting Canadian crude overseas may be part of the solution to earning social licence. Three proposals along these lines are currently on the table in British Columbia (see story below). While still in their very early stages, they may hold some promise, says Mr. Langrish.

“The two refinery proposals do not fit the traditional model of refining where crude is refined close to end users and easily moved to market,” he says. “However, if the Asian market in particular has an appetite for product that is refined in Canada, this could change the calculations behind these decisions.”

And with the Northern Gateway pipeline project apparently bogged down by community protest, proposals to refine crude on the west coast before shipping is a compelling part of the narrative, adds Mr. Langrish.

Mr. Munro says it’s difficult to tell whether the refinery projects make economic sense or not.
“The challenge with refineries is that they go through periods of making money, but in North America at a structural level they haven’t made money for a very long time,” he says.

“However, they may be an appropriate resource when their feedstock is heavily discounted. Canada is selling the cheapest crude in the world. You could argue that there’s an arbitrage opportunity by refining it and selling refined products at a better profit margin.”

Mr. Munro says while the B.C. refinery proposals are an attempt to better the value add in Canada and reduce the perceived environmental risk of Canadian crude being shipped from the west coast, he is more excited about projects such as Energy East, which plans to ship Alberta crude to eastern Canada where there are existing refineries.

Having more Canadian crude travel east may also provide additional market opportunities in Europe, which has been shaken by the conflict in Ukraine and its potentially negative implications for energy supply from Russia.

“Europe is clearly interested in deepening relations with a stable supplier like Canada,” says Mr. Langrish. “However, assuming all goes well, it would be 2020 before significant oil and gas exports to Europe could occur as current infrastructure constraints need to be addressed.”

Mr. Munro says a challenge in accessing the European market is that Europe is apparently not prepared to pay a premium for security of supply even though its gas supply from Russia though Ukraine is at risk.

“It makes perfect sense to export LNG from Eastern Canada to Europe where they have plenty of regasifaction facilities,” he says. “But the pricing parameters have always made it difficult to do so. We have to wait to see if the need for energy security eventually drives Europe toward LNG pricing that would support North American LNG exports.”