Increased Competition For Western Canada Heavy Oil With Exxon’s Start Of 150,000 b/d Hebron Oil Field, Offshore Newfoundland
Dec 1, 2017
All the big oil news this week (OPEC cuts, Keystone oil spill) overshadowed Exxon starting up oil production at the offshore Newfoundland Hebron oil field this week, which is to produce at peak rates of ~150,000 b/d from a single production structure. Hebron is significant as it produces 20 API, not like the 33 API oil at nearby Hibernia. This means it will compete against Western Canada heavy oil in PADD I East Coast and also PADD III Gulf Coast. The Gulf Coast is the big opportunity given declining oil production from Venezuela and also Mexico. The Hebron start up reinforces the need for Enbridge Line 3 expansion and/or Keystone XL for Western Canadian heavy oil to capture more of the Gulf Coast markets.
Exxon starts up Hebron first oil, peak production of 150,000 b/d. There was a significant news event that was mostly overlooked this week by the Keystone oil spill, Trans Mountain proceedings, and OPEC’s cut extension – it was first oil at Hebron. On Nov 28, Exxon announced [LINK] it started oil production at Hebron, offshore Newfoundland. Hebron is in the Jeanne d’Arc Basin (350 km SE of St. John’s) and is nearby other key offshore production at Hibernia. Hebron is a single offshore production structure and is planned for peak capacity of 150,000 b/d,
What was overlooked – Hebron is 20 API crude oil. The significance of Hebron is that it is not light oil like nearby Hibernia. Hibernia is light oil at 33.5 to 33.9 API (depending on Chevron or Exxon assays) and 0.54% sulphur. Whereas Hebron is 20 API and is a direct competitor to the Alberta heavy oil reference crude, WCS (Western Canadian Select), which is 20.6 API.
Logically, the first competing market is PADD I, the US East Coast. Unfortunately, Hebron is heavy oil and isn’t going to displace imported light oil that is delivered via tanker in Eastern Canada refineries. CAPP’s June 2017 report “Crude Oil Forecast, Markets and Transportation” is an excellent report [LINK] that should be in all reference libraries. CAPP notes “there are eight refineries in Eastern Canada, located in Ontario, Québec and Atlantic Canada. These refineries primarily process light crude oil and provide a combined crude oil refining capacity of 1.2 million b/d”. The logical first destination for Hebron is PADD I, the US East Coast refineries with refining capacity of 1.3 millon b/d. These refineries primarily process light oil, but CAPP notes that there is 208,000 b/d of heavy oil processing capacity. However, in going thru the list of refineries, there is one refinery (the 65,000 b/d United Refinery in Warren, Pennsylvania) that is inland and won’t be displaced by Hebron. United is supplied by its Kiantone pipeline that is supplies by Enbridge’s Line 10, which can carry a mix of light, medium and heavy oil. The rest of the refineries have water access and Hebron could compete here more effectively than by heavy oil by rail in places like New Jersey and Philadelphia refineries.
2016 PADD I East Coast: Supply By Type And Domestic Crude Oil
But Hebron will also compete in the Gulf Coast. Western Canada heavy oil has been increasing penetration with the decline in Venezuela and Mexico oil. CAPP says “Although Canadian deliveries to this region have increased in recent years as some additional pipeline infrastructure has gone into service, Canada is in third place supplying 333,000 b/d of the heavy crude oil demand” to PADD III. Notwithstanding the closer distance to PADD I, Hebron could also compete in the PADD III Gulf Coast refineries especially with Mayan less WCS differentials at ~US$13 to $14/b. Hebron would be an attractive stable long term source of supply compared to declining Venezuela and Mexico oil production. And lets not forget Exxon is a 35.5% co-venturer in Hebron and has major refineries in the Gulf Coast. Hebron’s tanker costs would not be subject to using Jones Act US flagged/manned tankers.
2016 PADD III Gulf Coast: Supply By Type And Domestic Crude Oil
Hebron adds competition to Western Canada heavy oil, reminds of the need for Enbridge Line 3 Expansion and/or Keystone XL. Trans Mountain expansion will be significant to let Western Canada heavy oil compete against Venezuela/Middle East heavy oil in Asia, and perhaps even more significantly, increase penetration in PADD V (West Coast). But the key opportunity for Western Canada heavy oil has been the declining Venezuela and Mexico heavy oil production and their primary market – PADD III, the US Gulf Coast refineries. Hebron will be able to complete in the Gulf Coast, which reminds us that Western Canadian heavy oil really needs to get Enbridge’s Line 3 expansion and/or Keystone XL on stream. Enbridge’s Line 3 expansion would add ~375,000 b/d capacity and could be first out of the gate and operational in ~21 months