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For Some Color on this Development, Oil & Gas 360® Interviewed Export Canada Economist Stuart Bergman

Earlier this month, the European Parliament decided to reverse an earlier decision that labeled Canadian oilsands crude as “dirty oil,” removing barriers to refiners in the E.U. to import bitumen from Canada. For insight on what this decision means for Canada, Stuart Bergman, Assistant Chief Economist at Export Development Canada, spoke with Oil & Gas 360® about the possible implications of the European Parliament’s decision.

Europe Called Canada’s Oil “Dirty”

The European Union’s Fuel Quality Directive (FQD) was adopted in its most current iteration in 2009, when amendments were added that required fuel suppliers to reduce the greenhouse gas intensity of energy supplied for road transport. In 2012, it was proposed that Canadian bitumen be rated 22% more carbon-intensive than conventional oil, making it deeply unattractive to Europe’s refineries, reports CBC.

Since 2012, the Canadian government has been lobbying the E.U. to remove the “dirty oil” designation, saying that the label is discriminatory.

Canada

 “Dirty” No More

On December 3, 2014, legislation to remove the “dirty oil” label from Canadian oilsands crude was rejected by the Environmental Committee of the European Union, prompting a vote from the full European Parliament. The parliament decided to remove the label on February 6, 2015, meaning refiners could more easily import bitumen. The new FQD requires refiners to report their average emissions, without discriminating against Canadian oilsands crude if it is a part of the refining feedstock.

According to Mr. Bergman, this decision came at an opportune moment for Canada, which is currently in the midst of negotiating the Comprehensive Economic and Trade Agreement (CETA), which is designed to open new markets in the EU to Canadian exporters. Not only are the EU and Canada working to increase the ease of cross border trading, but Europe is also dealing with falling gas supplies from Russia as events unfold in Ukraine.

A Larger Piece of the Pie for Canada

There are some companies who are already shipping bitumen to Europe, says Mr. Bergman, but removing the “dirty oil” label will allow more Canadian companies to take a larger piece of the pie. Canadian companies’ share of crude imports to the E.U. is “small for now, but Canada is a more cost efficient option for European refiners,” said Mr. Bergman. Over time, Canadian exporters will become a growing part of European imports as they are able to offer greater efficiencies to E.U. refiners by being closer than some exporters and being able to offer bitumen at lower prices than other feedstocks.

Higher Growth Rates in Emerging Markets and Europe

“Trade with traditional markets is only growing about 2% a year. Emerging markets can sustain much higher levels of growth in the 5%-6% range, and sometimes even higher. Around 9%-10%.” While the E.U. is far from being an “emerging market,” it does offer new opportunities to Canadian exporters that are looking to grow. The decision by the European Parliament will give exporters in Canada access to well established markets that are looking to replace imports that were coming from Russia before.

“I want to be really clear about this,” said Mr. Bergman on the topic of export diversification, “It’s not about diversifying away from the U.S. That wouldn’t make sense. It’s about diversifying to growing markets in addition to the U.S.” Canada and the U.S. share strong trade ties in addition to a common language and business practices, it makes sense for there to be high levels of trade between the two countries says Mr. Bergman, but other markets are growing at a rate that cannot be ignored.

Established U.S. Customers Come to Mind First

All of this isn’t to say that Canadian exporters are going to be running to be next in line to ship to Europe, however. Challenges still remain says Mr. Bergman. “I think one of the largest problems we face here in Canada is with mindset. It’s hard sometimes to see beyond what’s already in front of you.” Mr. Bergman says that many Canadian exporters have excellent relationships with their business partners in the States, so it is sometimes hard for them to imagine going anywhere else.

Canada

Data: National Energy Board of Canada Graph: Oil&Gas360

 

The graph above shows Canadian bitumen exports to the U.S. and around the world in barrels of oil for Q3 2014. Total U.S. imports of bitumen were 825,762.8 barrels of oil out of the total 836,879.6 exported from Canada. Put another way, 98.7% of Canadian exports of bitumen in Q3’14 went to the U.S. while all other importers made up the remaining 1.3%.

With oil prices down and Europe looking for new suppliersCanadian exporters are looking for new business whether they ever imagined it before or not. Oil prices are down over 50% since their high last June, and imports to the E.U. from Russia falling, Europe is thirsty for supply. “If necessity is the mother of invention, then crisis is the mother of transformation,” says Mr. Bergman. “Not to say that we need crisis in order to transform, but recent events have certainly encouraged that to happen.”

The European Parliament’s decision is by no means a slam dunk, says Mr. Bergman. “The vote was close, and they may revisit it again later,” but for the time being, it seems that steps are being taken in order to ensure that Canadian exporters will have greater access to European markets at a very opportune time.

Transporting Canadian Crude to Europe: Lots of Options

A number of options are available to transport the oilsands to the coast and on to Europe. The largest of these projects is TransCanada’s (ticker: TRP) Energy East, which has a planned capacity of 1.1 MMBOPD and will run from Alberta and Saskatchewan to refineries in Eastern Canada. Mr. Bergman said that other methods for transporting the oilsands crude include trucks, rail, the Enbridge (ticker: ENB) Line 9 Reversal and the hotly debated Keystone XL pipeline.

“Even though Keystone goes down to Texas, it will still give Canadian exporters access to other markets,” said Mr. Bergman. “It will allow for Canadian companies to diversify their exports.”

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.


Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.