China opts for Canadian Oil

Canadian oil producers are finding new ways to access the growing Asian oil market. Looming supply from Venezuela has led to China approaching Canada to feed their demand.

Significantly, Canadian oil is over 60 per cent cheaper than U.S. benchmark West Texas Intermediate and global marker Brent.

Background

Oil reserves in Canada at the beginning of 2015 estimated to be 172 billion barrels. Canada has the third largest oil reserves in the world and is the world's fifth largest oil producer and fourth largest oil exporter. The vast majority of Canada's petroleum resources are concentrated in the enormous Western Canadian Sedimentary Basin (WCSB), one of the most massive petroleum-containing formations in the world.

Over 95 per cent of these reserves is in the oil sands deposits in the province of Alberta. Alberta contains nearly all of Canada's oil sands and much of its conventional oil reserves. Saskatchewan and offshore areas of Newfoundland, in particular, have substantial oil production and reserves. Alberta has 39 per cent of Canada's remaining conventional oil reserves, offshore Newfoundland 28 per cent and Saskatchewan 27 per cent, but if oil sands are included, Alberta's share is over 98 per cent.

The petroleum industry in Canada is also referred to as the Canadian "Oil Patch"; the term applies especially to upstream operations (exploration and production of oil and gas), and to a lesser degree to downstream operations (refining, distribution, and selling of oil and gas products).

Although Canada is one of the largest oil producers and exporters in the world, it also imports significant amounts of oil into its eastern provinces since its oil pipelines do not extend all the way across the country and many of its oil refineries cannot handle the types of oil its oil fields produce.

Analysis

To make up to the dwindling supply of Venezuelan oil, Chinese refiners have turned towards cheap Canadian oil to meet infrastructural demands in China. Significantly, Canadian oil is over 60 per cent cheaper than U.S. benchmark West Texas Intermediate and global marker Brent. Canadian oil, apart from being a source of fuel -- it’s rich in bitumen, a black residue used to build everything from roads to runways and roofs.

Chinese infrastructure spending in the second half of 2018 has accelerated at five times the pace of the first six months. The demand for the material will further increase if the Chinese President’s new reforms focus on boosting infrastructure.

China bought 1.58 million barrels of Canadian crude for loading in September, almost 50 per cent higher than the 1.05 million barrels in April, data from cargo-tracking and intelligence company Kpler show. Li Haining, an analyst with industry consultant SCI99 in China’s Shandong province, said that “The policy of boosting infrastructure investment has been bullish for bitumen.”

The rest of the world is witnessing a surge in oil prices due to impending American sanctions squeeze Iranian exports and an economic crisis hits Venezuelan shipments. Besides, fears of OPEC’s indecision to ease a looming supply crunch have led to a significant rise in the prices of oil. However, the price for Western Canadian Select (WCS) crude fell to just $26 a barrel last week, while benchmark West Texas Intermediate crude closed at $71.98. At a particular point, the differential was $52 a barrel according to Bloomberg. “It’s a crisis,” expressed, Tim McMillan, chief executive of the Canadian Association of Petroleum Producers.

This slump in Western Canada Select is the lowest in two years. The drop can be attributed to the rising production from Canada’s oilsands as it overwhelms the nation’s pipeline capacity. Scotiabank commodity economist Rory Johnston said that “It’s not just about heavy (oil), it’s about all Canadian oil that is getting punished here by the lack of pipeline capacity.” The critical point is revenue is being lost because of the country’s inability to build new pipelines and get resources to market in the most efficient manner possible.

WengInn Chin, a senior oil market analyst at industry consultant FGE in Singapore, said that China is branching out for other alternatives. The country has also turned to producers in Brazil. Sophie Shi, a Beijing-based analyst with industry consultant IHS Markit, said that “With traditional heavy oil shipments shrinking globally, trade flows are being reshaped and alternative heavy oil supplies from countries such as Canada are becoming sought after.”

Counterpoint

The discount of Canadian oil has a disadvantage as for how Scotiabank forecasted the Canadian oil patch would be stuck for at least 18 months in a period of constrained takeaway capacity, potentially shaving $15.6 billion in revenues from the sector this year. A report by the Fraser Institute estimates Canadian oil producers lost around $20.7 billion in foregone revenues between 2013 and 2017, or about one per cent of Canadian GDP, due to a lack of pipeline access.

Additionally, the further increase in extraction of oil will have a drastic effect on the marine life. Vibrations from large ships have an environmental impact as it disrupts killer whales’ ability to hunt prey and communicate with each other.

Assessment

Our assessment is that the present geopolitical tensions between the US and Iran have a drastic impact on oil prices in the world. The uncertainty is making the market highly volatile despite the continued demand. We feel that though China’s approach towards Canadian oil is logical, the lack of an effective pipeline system could possibly impact the supply. We also think that other countries apart from China will approach Canada in demand for oil. Thus increasing Canada’s competitiveness and participation in the global oil market.