Refiners Shun New Canadian Crude Blend

Enbridge Inc has approved a new stream of heavy Canadian crude for export on one of its major oil pipelines to the United States, according to four trading sources. The only problem? No one wants it.

Canada produces more heavy than light crude because of its vast oil sands projects in northern Alberta. Space on the Enbridge (ENB) system for heavy barrels is in short supply, with congestion set to worsen as oil sands production grows.

Enbridge's plan to squeeze more heavy crude onto its pipelines by shipping the new grade is its latest attempt to resolve bottlenecks in the 2.85 million barrel per day (bpd) Mainline system, traders in Calgary said. The system ships the bulk of Canada's crude exports to the United States.

Limited pipeline capacity has lead to a glut of crude building up in storage in Alberta, widening the discount on Canadian producers' oil and has deterred some companies like Royal Dutch Shell (RYDAF) and Statoil ASA (STOHF) from building oil sands projects altogether.

Since late last year shippers have had the option of shipping the new blend known as Canada Heavy Sweet (CHS) crude on Enbridge's Line 3, which can carry up to 390,000 bpd of primarily light crudes from Alberta, to Superior, Wisconsin, and is currently underutilized.

Some refiners had inquired about the new crude but so far nobody has bought any, one source at a Canadian oil logistics firm said.

Refiners are unsure about the quality of the CHS blend and also are concerned about how it would be impacted through commingling with other batches of different crude blends shipped on Line 3.

To buy it, refiners would need to see cheaper prices, he said.

Refiners are typically wary of processing new crude blends as their impact on expensive catalysts used to make fuel from crude is untested.

The proposed blend is no exception, said Randy Segato, president of the Canadian Crude Quality Technical Association.

"No refiner is going to jump on this until they know what it looks like," Segato said. "The general specifications are unique."

Segato said CHS appeared to be a blend of very light sweet conventional crude with a conventional lower tan (total acid number) heavy crude, and perhaps medium and possibly some synthetic crudes too.

BP suggested the unusual blend of light sweet and heavy crude to Enbridge, three trading sources said. BP processes tens of thousands of barrels a day of Canadian crude in its U.S. refineries.

BP did not respond to a request for comment but the trading sources, who are all shippers on the Enbridge system, said the company could potentially use the blend at its 413,500 bpd Whiting, Indiana, refinery, one of the largest consumers of heavy Canadian crude.

A handful of companies with blending facilities and storage tanks in Alberta could blend the CHS crude, should refiners show interest in buying it, sources said.

Enbridge is always looking for more space on its pipeline system and has talked before about needing more heavy crude capacity, but could not speak to specific products or lines as that was client information and commercially sensitive, a company spokeswoman said.

Enbridge has already added more than 400,000 bpd of extra capacity since 2014 by optimizing its pipeline network. The Canadian government recently approved one new pipeline project for Enbridge and one for Kinder Morgan (KMI).

Even so, market access for Canadian crude producers is expected to be tight for years to come.

New crude streams are usually driven by changing output as oil projects come on line, and each new blend must go through Enbridge's quality approval process.

By Nia Williams