The pivot by OPEC members from their traditional market in the United States is a stark challenge for Canada’s long-delayed export plans.doranjclark/Getty Images/iStockphoto
Asia's biggest oil consumers are leaving Canada behind, dealing another blow to the energy industry's export ambitions as the provinces seek agreement on building major oil sands pipelines.
Analysts say cargoes to the Pacific from the Organization of Petroleum Exporting Countries have surged in recent months – part of an escalating battle for market share that has heaped pressure on U.S. and world oil prices and forced a sharp pullback from Alberta's oil sands.
The pivot by OPEC members from their traditional market in the United States is a stark challenge for Canada's long-delayed export plans, upending assumptions that Alberta crude will play a big supply role in the Pacific region.
For years, China, Japan, South Korea and other Pacific countries were held out as crucial growth markets for oil sands crude, fuelling plans to spend billions on major pipelines. State-run companies from those countries were among the largest investors in Canadian energy assets in recent years, buoyed by expectations that the new pipelines would increase exports.
Now, the market has shifted dramatically, narrowing the window of opportunity for an industry that insists wider access to global markets is key to boosting prices for Alberta's landlocked oil.
"It's a Shangri-La, yes, but it's still one step over the horizon," said Martin King, an analyst at FirstEnergy Capital Corp. in Calgary.
"I think there's still an opportunity there, but certainly if there was [another] outlet to the West Coast, it would be a much tougher game now for Canadian barrels."
The heightened competition comes with Canadian premiers set to unveil a broad energy framework this week that hints at accelerating approvals for oil pipelines and other cross-border infrastructure.
Efforts to boost exports of Alberta oil to the Pacific have been stalled for years by a combination of environmental and political resistance to proposals such as Enbridge Inc.'s $7.9-billion Northern Gateway. The pipeline would ship up to 525,000 barrels per day of oil-sands-derived fuel to a supertanker port at Kitimat, B.C.
Enbridge applied to build the project in 2010, projecting a market for Canadian oil in the Pacific of some 1.75 million barrels a day – a figure some analysts say now seems wildly optimistic. The company has backed off a planned start date of 2018 for the pipeline, saying it needs more time to negotiate with aboriginal groups.
Demand for heavy oil in the Pacific remains robust, climbing at an annual average of 1.2 million barrels daily in recent years, according to data from Energy Aspects Ltd. "It's just that, logistically speaking, Asia has already moved on," said Amrita Sen, chief oil analyst with the firm.
Latin American crude scarcely figured as a large competitor to would-be Canadian exports in the Asia-Pacific region when Enbridge first applied to build Gateway. "Now, it's really picked up," she said, citing an increase in Venezuelan cargoes.
Iraq also recently launched a new grade of heavy oil, exporting about 620,000 barrels per day of so-called Basra Heavy crude in June, according to the International Energy Agency.
Nigerian exports to the region jumped about 50 per cent last year from 2013 to 558,000 barrels per day, mirroring a rise in shipments from Saudi Arabia and Iran, according to analysts and OPEC trade data. "They are really going for market share in Asia," Ms. Sen said.
By contrast, Canadian oil producers are limited to sporadic shipments from U.S.-based Kinder Morgan Inc.'s Trans Mountain pipeline to Burnaby, B.C. Some of the world's largest energy companies have backed a $5.4-billion plan that would nearly triple capacity on the system, but the idea is deeply unpopular on the coast.
Oil companies "are still kind of hoping for the West Coast, but are not really hanging their hat on it," Mr. King said, citing strong support for alternatives such as TransCanada Corp.'s Energy East proposal and expansions to Enbridge's mainline network to the U.S. Midwest.
"They're looking at getting barrels down to the U.S. Gulf Coast and selling into the international market that way as well," he said.