Northern Gateway approval expected to have significant impact on Canadian oil markets

The Canadian Joint Review Panel’s approval last week of the 525,000 b/d Northern Gateway pipeline, from Bruderheim, near Edmonton, to Kitimat, British Columbia could spell the end of steeply discounted Canadian heavy sour crudes. It also may reduce the urgency to build the Keystone XL Pipeline and Energy East Projects, though if projected production increases come into effect in Canada, Northern Gateway won’t be enough to handle that rise.

Canadian heavy sour crude differentials to WTI have gone on roller-coaster rides because that supply is nearly 100% dependent on US markets, primarily in the Midwest, Gulf Coast and West Coast. Any pipeline or refinery hiccup had led Western Canadian Select, the benchmark of Canadian heavy sour crudes, to be plagued by steep discounts. (As the accompanying chart shows.)

wcsdiffThe “landlocked” Canadian heavy sour crude, when the Northern Gateway pipeline comes online, will allow greater shipment of Canadian heavy sour crudes to Asia, the region in the world with the highest demand growth. China and Asia in total are expected to add slightly more than 3-million b/d of refining capacity between now and 2016, according to OPEC.

Enbridge is expecting the Northern Gateway project to be in operation by 2018.

(Canadian producers can access the Asian markets to a limited degree by shipping oil to the West Coast on the TransMountain Pipeline. But that’s only 300,000 b/d, though it has plans to grow to just under 900,000 b/d.)

The Northern Gateway pipeline will reduce Canadian heavy sour crudes’ dependence on the US Midwest and Gulf Coast and will offer support to the differential for Canadian heavy sour crudes to Calendar Month Average (CMA) WTI. The access to a crude oil-hungry region will only boost Canadian heavy sour differentials.

“The need to reduce dependence on the US market is the key to ensuring Canadian heavy sour crudes obtain market value and not fall into a boom bust cycle,” said a Canadian producer.

Northern Gateway means linking the Canadian crude oil market to the international market beyond the US, which exposes Canadian crude oil to international arbitrage opportunities. The arbitrage will ensure Canadian crudes do not suffer the same fate as has occasionally occurred, where a temporary glut emerges and the discount to CMA WTI suddenly drops to $40/b and $50/b discounts.

Western Canada Select is currently trading at around CMA WTI minus $26/b, according to Platts data.

With the Northern Gateway line, the other pipeline projects that have plans to ship Canadian heavy sour crudes to the US Gulf Coast and Eastern Canada seem less urgent now than ever before, according to traders active in the market for Canadian crudes.

The 830,000 b/d Keystone XL pipeline is a bullet line from Hardisty, Alberta, to Cushing, Oklahoma, while the Energy East project is a 1.1 million b/d pipeline from Hardisty to Saint John, New Brunswick. And Keystone XL, of course, is tied up in a political battle for the necessary US State Department approval to cross the Canada-US border.

“The Keystone XL line, more than Energy East is needed because with more than 50% of total US refining capacity located in the Gulf Coast and with refiners having the capacity and capability to refined asphaltic crudes, it will offer Canadian heavy sour crudes access to more markets and enable them to capture arbitrage values,” said a Gulf Coast refiner.

The fear for much of the Canadian oil patch is that only when there is sufficient takeaway capacity to Asia and the US from Alberta will Canadian crude production rise to its potential, because producers increasingly fear the return of steep discounts should there be inadequate ability to move that oil to market.

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Total Canadian crude production in 2013 is expected to be just under 3.5 million b/d, with production expected to rise to 4.85 million b/d by 2020, according to the Canadian Association of Petroleum Producers. Canadian heavy sour crude output from oil sands operations is expected to rise by 1-million b/d by 2018,

The Northern Gateway and Keystone XL pipelines are expected to be able to take away some of the first projected increases, when oil sands production from Western Canada is expected to rise by about 300,000 b/d, according to CAPP.

The Energy East project, which TransCanada planned to take crude oil to eastern Canada refineries, takes into account the growth in oil sands production between 2015 and 2020, estimated at about 1-million b/d.

“The Energy East project is what really takes into account growth in Western Canadian crude output. It is too premature to say if the urgency to build the Keystone XL and Energy East projects has lost momentum,” said a Canadian pipeline source familiar with the pipeline projects.

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  1. Simon Jacques at January 4, 2014 8:51 pm

    The forgotten and thirsty Brent Montreal/WCS Hardisty is raising the hand on this chart !

  2. Esa Ramasamy at December 30, 2013 9:39 am

    Hi Kermit,
    The idea behind the Northern Gateway project is to ship Canadian heavy sour crudes on VLCCs, namely to Asia. This does not mean you can’t ship these crudes on smaller Suez Max or Aframax vessels, which cost more. Please note, US West Coast ports in California and Washington state are not equipped to handle a VLCC, it would have to be lightered. Second, there would most likely be an increase in Canadian heavy sour crudes going to California and challenging ANS in that market. The bulk of exports from Kitimat are looking across the Pacific for a home, which is believed to the growth area for crude oil and refined products demand.

    • Esa Ramasamy at December 30, 2013 9:52 am

      Also Kermit, US West Coast refiners are geared towards refining medium sour crudes – as such it limits the amount of very heavy sour crudes they can refine. They could blend up Canadian heavy sour crudes with lighter Bakken Blend crudes to meet their requirements but blending has its own complications.

  3. John Kingston at December 30, 2013 9:04 am

    Kermit, one thing to remember is that oil from the oil sands carries a very heavy Carbon Intensity rating under the California Low Carbon Fuel Standard. California refineries choosing to use it are going to need to ensure that they either buy credits to offset such a high CI, or they are going to need to blend in more low-carbon inputs, like a low CI-rated crude or sugar-based ethanol. This would make California a less-than-optimal market for oil sands-based crudes.

  4. Simon Jacques at December 28, 2013 5:58 pm

    Happy 14′ to Platts,

    “China and Asia in total are expected to add slightly more than 3-million b/d of refining capacity between now and 2016, according to OPEC.”

    To your best knowledge, what will be the % of this new refining capacity geared towards Heavy Sour ?

    Best regards !

    • Kermit at December 29, 2013 1:00 pm

      Wouldn’t shipping to California refineries be a better fit? They already have heavy sour ability and the voyage is much shorter.

    • Esa Ramasamy at December 30, 2013 9:49 am

      Hi Simon, Season’s Greetings
      Most of the 3-million b/d new refining capacity coming online in Asia (mostly China) are complex refineries with coking capacity, which means they can refine crudes with specific gravity as low as 15 degrees API (very heavy sour crudes)
      Almost 90% of all new refining capacity coming online in Asia would be able to handle Canadian and Arabian heavy sour crudes.

  5. Reinier Kanis at December 26, 2013 1:57 pm

    I do get that the NEB said yes to this project, I do understand Harper really wanted this project badly, what I do not get is how any logical person would come to the conclusion that this project will go ahead?

    Unless ship loads of bribe money are sent to First Nations, along with dream homes with beach frontage in Hawaii, no rational person could ever conclude that the Supreme Court of Canada will disagree with First nations that without their consent this pipeline cannot proceed.

    Furthermore Harper could not possible get re-elected if he loses most of his remaining BC seats in the House of Commons, so to give this project the go ahead would be political suicide for the Conservatives.

  6. David Prior at December 24, 2013 5:12 pm

    I think what Forward Thinker is suggesting is “Don’t count your chickens before they hatch”, especially with colleagues like oil spill experts: 60 Minutes

  7. John Kingston at December 24, 2013 3:32 pm

    Thanks for your comment, Forward Thinker. Our job here was to talk about how the Northern Gateway could impact oil markets. It isn’t necessary to write about the pipeline and be then required to write about every single aspect of the line’s construction. So The Barrel wrote about the aspect of the markets; that’s all. Your comments are appreciated, but I think to call it one-sided is a bit unfair. Yes, it looks as the “side” of what it is going to mean for markets. That is what it set out to do. These other aspects that you raise are certainly legitimate topics for discussion, but not all of them can be squeezed into every story or blog post.

  8. Forward Thinker at December 24, 2013 12:51 pm

    I get where the bitumen producers, China and Alberta all benifit from Northern Gateway, but a spill into a fish spawning river or the Douglas Channel would devastate the fishing industry and Tourism in those areas. Those industries are worth Billions a year to BC. They have promised jobs building the pipeline, but those would be temporary at best and likely a large portion of those jobs will go to TFWs because the trained workforce here does not have enough to meet the need and little investment to create those trained workers is being made by any of the companies. The permanent jobs will be few, about fifty. The tax revenue is estimate at $50,000,000 a year for thirty years….one spill could wipe that out. As we have seen in the Lac Magentic explosion, companies do not carry enough insurance and if the costs are high, declare bankruptcy and walk away. They leave the cleanup and compensation to fall on BC tax payers because Alberta will not help. Kalamazoo should have thought us about the culture of Enbridge when it comes to safety and how hard bitumen is to clean up even in a calm accessible river. This pipeline crosses swift rivers in remote areas. Clean up will be extremely difficult and it is more likely Enbridge will just cover it over as they did in Michigan. Clean up in an ocean environment will be impossible, especially during a winter storm. Northern Gateway has been structured as a limited partnership for the very reason to indemnify Enbridge from liability.
    The increase in the price of bitumen will go to companies for the most part, but type risk falls on taxpayers. The price of fuel in Canada will increase hurting transportation, fishing, forestry, manufacturing, tourism as well as families due to rising fuel costs. The rising Canadian will hurt exporting industries whils making imports more attractive, resulting in job losses in Canada.
    Your story is very one sided.


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