How the project impacts the tanker market
According to Poten & Partners, on October 30, 2014 TransCanada filed a formal application for the Energy East Pipeline Project with the Canadian National Energy Board. How will this 1.1 million barrels per day (b/d) pipeline impact the tanker market when it is completed?
The combined capacity of the Eastern Canadian refineries is more than 700,000 b/d. The smallest one is the 115,000 b/d refinery in Come by Chance, while Irving Oil operates the largest facility in Saint John, with a capacity in excess of 300,000 b/d. Refiners in Quebec and Atlantic Canada have only limited access to domestic crude oil and primarily rely on imported crude to run their facilities. Take, for example, the Come by Chance refinery in Newfoundland. This facility, which was recently bought by a group of US investors, sourced the majority of its crude from Iraq during the first 9 months of 2014, but the new owners switched to US shale oil.
Crude oil production in Eastern Canada comes primarily from offshore oil projects located off the coast of Newfoundland and Labrador. The total production from the main offshore fields, Hibernia, Terra Nova and White Rose was 230,000 b/d in 2013 and the Canadian Association of Petroleum Producers (CAPP) forecasts thatoffshore production will peak at 260,000 b/d in 2020, although new discoveries may change this outlook.
An analysis of Potens reported spot fixture information shows that the majority of the production from offshore Canada is currently exported to the US Atlantic Coast and Europe.
Recently, Poten & Partners have seen a few cargoes of heavy Western Canadian Select exported from Canadas East Coast to Europe and the US Gulf. This heavy oilsands based crude arrived in Montreal via rail and these were likely one-offs. However, the potential for exports could increase significantly when Enbridges reversal of Line 9 (currently running from Montreal to Westover, Ontario) is completed, bringing an additional 300,000 b/d of mostly heavy sour crudes, as well as some U.S. Bakken crude, into Montreal.
However, the big changes will happen by the end of 2018, when the Energy East pipeline is projected to be finished. We may see very different tanker movements from today. Energy East, Line 9 and Canadian offshore combined is likely to create a glut of crude on Canadas East Coast. Against 1.6 1.7 million b/d of crude supply, there will only be 700,000 b/d of Canadian demand. Since Poten & Partners expects that several of the Canadian refiners will continue to run (some) imported crude, the surplus could well be in excess of 1 million b/d. Some of this crude may end up on the US East Coast, but these refiners favour light sweet crude and are increasingly supplied by domestic shale oil. Since Irvings facilities in St. John are capable of handling tankers up to and including VLCCs, there are no restrictions on vessel sizes for exports and so Poten & Partners expect that significant long-haul export trades to both India and China will develop.
The impact on the tanker market overall will depend on how much crude will continue to move into Canada. If producers in West Africa and the Arabian Gulf, which currently supply the bulk of the crude oil to the East Coast of Canada want to maintain market share, there will be a steady supply of vessels. If the Energy East pipeline squeezes these producers out of the Eastern Canadian market, there could be a significant shortage of tonnage, in particular for VLCCs, in the Atlantic Basin.
Source: Poten & Partners