Attack on Saudi oil threatens to pinch Eastern Canada supplies

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Eastern Canadian refiners are scrambling to secure crude supplies as the attack on Saudi Arabian energy infrastructure reverberates through the global oil market and has already led to higher gasoline prices in many parts of Canada.

Drone and cruise missile strikes knocked 5.7 million barrels a day (b/d) of Saudi oil production off-line last weekend, an amount equal to more than 5 per cent of global demand. Yemen’s Houthi rebels claimed responsibility for the attack, but the U.S. and Saudi Arabia say Iran is responsible.

Saudi Arabia is racing to repair the damage and tapping its oil reserves to keep exports flowing.

Any disruptions to the kingdom’s vast oil supply will be particularly felt by Irving Oil Ltd.’s Saint John refinery in New Brunswick, which uses virtually all of the Saudi crude that is shipped to Canada.

In the weeks ahead, higher prices will likely be paid for foreign crude supplies not only by Irving Oil, but also by other petroleum companies that operate plants in Quebec and Ontario, as well as Newfoundland’s lone refinery, industry experts say.

“The eastern half of Canada is held hostage to global oil price shocks,” Michael Tran, managing director of global energy strategy at RBC Dominion Securities, said in an interview from New York. “Higher oil prices will certainly hit the pocketbook of Canadian consumers.”

Patrick DeHaan, head of petroleum analysis for GasBuddy, said he expects increased oil prices to translate into rises in the short term in North American pump prices.

“The shock that such an event happened in Saudi Arabia, a stable and reliable oil producer, will likely continue to haunt the market,” he said in a research note.

Canadian oil production last year of 4.6 million b/d exceeded domestic needs by far, with Canada exporting 3.7 million b/d. But the lack of Canadian pipelines to carry petroleum from west to east means refineries in Central and Atlantic Canada still depend to varying degrees on imports of foreign oil to help operate at full capacity.

Last year, refineries in Central and Atlantic Canada imported 592,600 b/d of oil from 10 foreign sources, led by the United States (64 per cent of imports) and Saudi Arabia (18 per cent), according to the Canada Energy Regulator, formerly known as the National Energy Board. The Canadian International Merchandise Trade Database shows about 115,000 b/d from Saudi Arabia flowed into Canada in 2018.

Canada accounted for 1.5 per cent of total oil exports out of Saudi Arabia last year.

The severity of the damage and duration of Saudi outages are the biggest wild cards facing oil markets. International benchmark prices for North Sea Brent crude initially surged on Monday and then fell mid-week, but are still 7-per-cent higher than they were before the attack. Saudi officials said that 2.5 million b/d of lost output had been restored by Tuesday.

SAUDI ARABIA’S CRUDE

OIL EXPORTS IN 2018

Thousands of barrels per day, by destination

Saudi Arabia

7,371.6

Middle East

266.9

North

America

1,020.4

Africa

163.9

Latin America

70.5

Asia and

Pacific

4,980.8

Europe

869.3

NEW BRUNSWICK'S CRUDE

OIL IMPORTS AND REFINERY

CAPACITY, 2018

Canada

115.0

Refinery capacity: 318

Other

57.1

Azerbaijan

28.0

New

Brunswick

115.0

U.S.

44.6

Saudi

Arabia

115.0

Note: Numbers may not add up due to rounding.

Imported crude oil

by origin

MURAT YÜKSELIR / THE GLOBE AND MAIL,

SOURCE: OPEC; NATURAL RESOURCES

CANADA; CANADIAN INTERNATIONAL

MERCHANDISE TRADE DATABASE

SAUDI ARABIA’S CRUDE OIL EXPORTS IN 2018

Thousands of barrels per day, by destination

Saudi Arabia

7,371.6

Middle East

266.9

North

America

1,020.4

Africa

163.9

Asia and

Pacific

4,980.8

Europe

869.3

Latin America

70.5

NEW BRUNSWICK'S CRUDE

OIL IMPORTS AND REFINERY

CAPACITY, 2018

Canada

115.0

Refinery capacity: 318

Other

57.1

Azerbaijan

28.0

New

Brunswick

115.0

U.S.

44.6

Saudi

Arabia

115.0

Imported crude oil

by origin

Note: Numbers may not add up due to rounding.

MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE: OPEC;

NATURAL RESOURCES CANADA; CANADIAN INTERNATIONAL

MERCHANDISE TRADE DATABASE

SAUDI ARABIA’S CRUDE OIL EXPORTS IN 2018

Thousands of barrels per day, by destination

Canada

115.0

New Brunswick

115.0

North

America

1,020.4

Europe

869.3

NEW BRUNSWICK'S CRUDE

OIL IMPORTS AND REFINERY

CAPACITY, 2018

Refinery capacity: 318

Saudi Arabia

7,371.6

Asia and

Pacific

4,980.8

Other

57.1

Azerbaijan

28.0

U.S.

44.6

Latin

America

70.5

Saudi

Arabia

115.0

Africa

163.9

Imported crude oil

by origin

Middle East

266.9

MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE: OPEC; NATURAL RESOURCES CANADA;

CANADIAN INTERNATIONAL MERCHANDISE TRADE DATABASE

“Refiners will be bidding up the price to make sure they get supply, which means every other refiner’s price will be going up as well," said Judith Dwarkin, chief economist at RS Energy Group in Calgary.

"It may be that more barrels will come out of the U.S. and go to Eastern Canada. Maybe more barrels will get diverted from the North Sea away from somewhere else to go to Eastern Canada. But basically, it augurs for a rearrangement of trade flows,” she said.

In the past, Irving Oil’s plant in Saint John has received crude from an array of sources, including from Western Canada and the Hibernia oil platform off Newfoundland. The plant will be coping with disruptions by ordering from other oil-producing countries to help maintain the supply chain, industry observers say.

Irving Oil spokeswoman Candice MacLean said the company remains focused on serving the needs of its customers. “At Irving Oil, we have a diverse and global supply network and currently do not anticipate our customers will experience any product or service interruption as a result of this issue," she said in a statement.

Last year, the Saint John refinery relied on Saudi oil to supply about one-third of its requirements. Irving is a major exporter of refined products such as gasoline.

Alberta Premier Jason Kenney said the attack on Saudi oil installations highlights the importance of moving toward better coast-to-coast energy security.

“Eastern Canadian economies are fuelled by oil imports from foreign countries – a lot of it now from the United States, but some of it still from OPEC dictatorships like Saudi Arabia, from places like Algeria,” Mr. Kenney told reporters this week during a trade mission in New York. “That’s why our friends in Eastern Canada would like to see something like Energy East, a pipeline that can displace foreign oil imports.”

Energy East would have shipped up to 1.1 million b/d of diluted bitumen to New Brunswick from Alberta. TC Energy Corp., formerly named TransCanada Corp., cancelled its plans for the $15.7-billion pipeline in 2017 in the wake of lengthy regulatory delays and after U.S. President Donald Trump rekindled hopes to build the Keystone XL pipeline to the southern United States. Keystone XL, however, remains unbuilt due to legal challenges.

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