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Energy Watch: California buying more Canadian oil sands crude

ANALYSIS: There is a certain word to describe when the region widely seen as the heart of the anti-oil sands movement starts buying much more oil from Canada’s oil sands.

Vocabulary aside, consider this bald and unbiased statistic. During the first three months of 2013, California imported slightly under 90,000 barrels of Canadian oil via train according to Bloomberg data. From early January to the end of March this year, the same data shows that figure topped 700,000 barrels, an increase of roughly 700% over just one year.

Of course, that figure is for all Canadian crude delivered to California on railways in the first quarter of this year, which conceivably could be entirely lighter oil derived from outside northern Alberta’s oil sands region where the heavier bitumen produced generally trades as Western Canada Select (WCS) grade. Chris Theal, CEO of Kootenay Capital, notes most of the refining capacity on the west coast of the United States is geared to process light oil, largely from Alaska.

“That being said, the Bakersfield area is a legacy heavy oil area and would be where Canadian heavy or dilbit [read: diluted bitumen] would displace local supply,” Theal said. “Particularly if the [price] spreads are wide enough to justify the rail transport costs to get it there.”

Alaskan oil production has declined every year since 2002, data from Bloomberg shows, while the price has been increasing as demand has not fallen with supply. Prices for Alaskan North Slope light oil currently tops US$107 per barrel while a barrel of Western Canada Select from the oil sands will cost a California refiner a little more than US$82; providing overall “feedstock” cost savings of about 30.5 percent for refineries geared to process both light and heavy oils.

“When you do the math, California is beginning to realize that they can save money by importing Western Canada Select,” said Shafik Hirani, director of the Calgary division for Investors Group Financial Services.”

RE-EXPORT POTENTIAL

It has been illegal to export unrefined oil from the United States since the government passed a law in 1975 banning the practice in the wake of the first major OPEC embargo. However, Bill Bonner notes California has an exception allowing it to export up to 25,000 bpd (barrels per day) specifically of heavy crude produced in California as well as other heavy crude originating from outside the U.S.

“You don’t suppose the guys in California are selling WCS to Asian interests, along with some of their own heavy crude?” the President of Brickburn Asset Management asked hypothetically in an email to BNN.

“Who needs Northern Gateway when the clever Americans are selling Canadian crude for us?”

WHAT IS THAT DARN WORD?

Remember how California has positioned itself in debates around key North American energy issues such as the Keystone XL pipeline proposal. It is a region where a senior policy maker can openly claim Keystone XL will cause cancer, where a local billionaire will throw millions of dollars at political candidates across the country based solely on their willingness to oppose the now six-year-old oil sands pipeline proposal and where local activists stage mock takeovers of a federal building to demonstrate their opposition to the ongoing development of Canada’s oil sands.

Amid all this, the data seems to say they are directly facilitating the same oil sands production growth they oppose every time they pull up to a local gasoline pump. Kootenay’s Theal also raised the oft-forgotten fact that California is home to the vast majority of American heavy oil production.

“I’ve seen independent reports that illustrate California heavy oil lifecycle emissions [from the oil well to a car’s tail pipe] have a greater carbon footprint than Canadian heavy,” Kootenay’s Theal said. “Not to mention they are using rail, which has higher transportation costs and a greater carbon footprint, than pipelined oil [to buy their Canadian crude].”

Overall crude by rail shipments to California more than doubled over the past year. According to the same Bloomberg data that tracked the growth in Canadian supplies, total train-based deliveries reached 1.41 million barrels in the first quarter of 2014, up from 693,457 during the same period one year earlier.

There are in fact many words to describe this trend, some not entirely polite. So for now, in true Canadian fashion, let’s just go with “fascinating.”

Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter
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