Advertisement 1

Shipping-fuel rule change cuts demand for Canadian oil

Article content

As if pipeline bottlenecks weren’t enough, Canadian heavy oil producers are facing a new barrier to marketing their crude.

New rules limiting the amount of sulphur allowed in shipping fuel is expected to cut demand for both high-sulphur fuel oil and the sour crude that yields it. In Canada, that could extend — or worsen — the biggest price slump in nearly five years.

Advertisement 2
Story continues below
Article content

As surging production runs up against limited pipeline space, Western Canada Select’s discount to West Texas Intermediate widened to more than $31 a barrel this month from an average of about $13 a barrel last year, data compiled by Bloomberg show. The bigger discount is needed to incentivize shipping by rail, which costs more, said Kevin Birn, a director on the North American crude oil markets team at IHS Markit.

Article content

While the pipeline bottleneck is expected to ease up next year, a new International Maritime Organization rule that goes into effect in 2020 will keep heavy crude at a discount of $31 to $33 a barrel against WTI, according to a July report by the Canadian Energy Research Institute, or CERI.

“We think you get a double whammy effect” in 2020, he said. “You have prices set by rail and, compounding that, is the IMO” rule.

Under the new rules, ocean-going ships worldwide will either have to install expensive, sulphur-removing scrubbers or use a fuel that has 86 per cent less sulphur. The resulting increase in demand for lighter crude will push more crude toward the complex North American refineries that currently turn heavy Canadian oil into higher-value fuels such as gasoline and diesel, putting downward pressure on heavy crude prices, according to CERI.

Advertisement 3
Story continues below
Article content

The rule change will come just as Canadian producers should be getting some relief in the form of greater pipeline access to U.S. and international markets.

Enbridge Inc.’s expanded Line 3 is scheduled to start operating in late 2019, delivering heavy oil from Alberta to Wisconsin. The $9.3-billion expansion of the Trans Mountain oil pipeline from Alberta to the British Columbia coast is scheduled to start about a year later, and TransCanada Corp.’s Keystone XL pipeline awaits a final investment decision but could start operating early in the next decade.

There’s still reason for optimism, however, as diminishing heavy oil production from strife-torn Venezuela and Mexico could help raise prices for Canada’s crude, Birn said.

The Alberta government’s pledge earlier this year of $1 billion to partial upgrading projects also may help Canadian producers overcome the challenges of the IMO rule, said Dinara Millington, vice-president of research at the CERI.

Unlike massive full upgraders, a smaller and cheaper partial upgrader would lighten the bitumen just enough so that it can flow through pipelines with little or no added condensate. Such plants could also remove impurities such as sulphur, Millington said. No such plants have been built in the oilsands yet, as various partial upgrading technologies are still in early stages of development.

Still, “the industry could take this challenge and turn it into an opportunity,” Millington said.

Bloomberg.com

Article content
Comments
You must be logged in to join the discussion or read more comments.
Join the Conversation

Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.

Latest National Stories
    This Week in Flyers