Canadian Crude Reaches Europe as U.S. Shale Oil Booms

22.01.2013 -

The United States now gets so much crude from its own shale deposits that Canadian exporters are selling as far afield as Europe, showing how deeply the U.S. energy revolution is transforming global oil flows.

As recently as 2011, close to 100% of Canada's crude exports went to its neighbour the United States, according to the U.S. government's Energy Information Administration (EIA).

But trade and shipping sources said more than 2 million barrels of light crude from Canadian offshore oilfields have gone to Europe in the last month, in a taste of what is to come.

The change is due to technological advances the U.S. expects will bring a 900,000 barrels per day (bpd) record jump in its oil output to 7.3 million bpd in 2013, the EIA said ealier this month, from places like the Bakken shale deposit in North Dakota that now feeds U.S. East Coast refineries served by Canada.

These refineries' traditional suppliers in West Africa, notably Nigeria, are also having to seek alternative customers and are feeling the pinch of the new Canadian competition in their established European markets.

"Globally Canada has been trying all the exports routes...U.S. east coast refineries are also taking more from Bakken fields so that should replace the flow from Canada and West Africa," said Olivier Jakob of consultancy Petromatrix.

The drilling technique hydraulic fracturing, or fracking, in which water, sand and chemicals are forced deep underground to drive out trapped oil and gas, have allowed access to millions of barrels of U.S. oil that were previously unattainable.

This shale oil is sweet - meaning it has low sulphur levels and is suitable for the U.S. refiners - like the Canadian oil it is supplanting.

So it is only these light Canadian crude grades, such as Hibernia, that have been exported to Europe.

"Shale oil is making its way to the east coast of the United States by rail so this is backing out offshore sweet east coast Canadian production," said a trader with a European refiner.

The trader said that the profit margin had widened sufficiently for arbitrage as it allowed for a nominal profit of nearly $1 million on an 600,000 barrel shipment.

Arbitrage denotes sale or buy opportunities, which arise with price gaps between regions that normally trade rarely or not at all.

Trade and shipping sources said two Hibernia cargoes of 600,000 barrels each arrived at Britain's east coast in late December to early January.

A Hibernia cargo of 1 million barrels is due to load from Whiffen Head, a Canadian offshore loading platform, this week and will go to Valero's Pembroke refinery, trade sources said.

Hibernia is the largest stream of three sweet crude oil grades produced in the Grand Banks formation, off Newfoundland, along with Terra Nova and White Rose. Canadian eastern offshore production was around 265,000 bpd in 2010, according to the EIA.

Crude produced in inland Canadian provinces such as Alberta is not currently linked to the east coast by pipeline, limiting the potential for future shipments to Europe.

Diverted cargoes

Rising U.S. shale oil output has already started re-routing flows of West African and Algerian light, sweet crude oil which used to flow regularly to the United States.

U.S. imports of light, sweet crude will fall to virtually zero by 2014, an executive of French energy company Total's trading arm predicted in October.

This progressive upheaval in crude oil patterns has prompted European refiners to look at changing their slates - lists of suitable crude oil grades for use as feedstock - to adapt.

India's Essar Oil, which owns the 296,000 bpd Stanlow refinery on Britain's east coast, has taken Canadian grades, a spokesman said.

"(Hibernia) was one of the 11 additional crudes we have added over the past year or so at Stanlow as part of initiatives to lower our crude costs and improve margins."

Traders said that the extra volumes of Canadian crude arriving in Europe have depressed prices for Nigerian grades, which have fallen around $1 since early December.

"(Canada) is not that far, if you can contemplate lifting West African then you might as well take Canadian," one European trader who has previously bought Canadian oil said.

The crude trade from Canada to Europe has until now rarely been profitable except at times when severe supply disruption made the shipping cost worthwhile.

During the Libyan war of 2011, Hibernia arrived in the Mediterranean as traders sought substitutes for Libya's light sweet crude. Cargoes of Terra Nova and White Rose have occasionally crossed the Atlantic to Northwest Europe.

Total Canadian crude oil production was around 3 million bpd in 2011, with about 70% heading to refineries in the U.S. Midwest, according to the EIA.

While oil from Canada's eastern coast can find other buyers, much onshore crude output is trapped in the continent's centre, as infrastructure to target the Asian market remains limited.