Valero Energy Corp. (NYSE: VLO) is the latest company entering the trend of shipping Texas crude oil to Canadian refineries.
The San Antonio-based company is the largest independent refiner in North America, and it began exporting last month from the Eagle Ford Shale to its refinery in Quebec, Canada.
With booming oil production coming out of Texas, it has more crude than it knows how to handle. The country as a whole is expected to topple Saudi Arabia as the world leader in daily crude oil production by 2020.
As U.S. production surges on, companies are able to sell refined products to foreign interests, but the export of domestically produced crude oil is strictly regulated, requiring government approval. And that approval is only granted to Canada.
The Commerce Department has not one iota of a problem handing over permits for exporting crude to Canada; the one stipulation is that an exchange of some equal part fuel, usually gasoline and/or diesel fuel, be returned to the U.S. But this isn’t a problem considering the U.S. openly imports oil from Canada regularly.
And now with Valero’s first shipment of Eagle Ford crude being processed, the company is perfectly positioned to take full advantage.
It has been granted licensing to export 90,000 barrels per day (bpd) to its Quebec refinery, which can handle 265,000 bpd. What is even better is that the refinery is specialized in handling the type of crude oil coming out of Texas, and more specifically, the Eagle Ford—light, sweet crude that normally is imported from Europe and Africa.
That will all change soon though. Valero’s Quebec refinery will switch to a 100 percent North American crude within the year or so.
And if you factor in the added cost of transport to Canada, the high quality yield of fuel that is produced makes it more attractive and profitable.
Canadian Refineries
With export licensing being given out in growing numbers, the amount of crude being sent into Canada from the U.S. is at a 13-year high—124,000 bpd, according to government data revealed on Monday. That’s double the amount from one year ago.
This growing trend infuriates refiners on the East Coast, who are forced to compete directly with imported Canadian-made fuel.
What that data doesn’t reflect is the rapid increase in transportation used in the shipping process; roads, rail, and pipelines have been increasing for months. There has also been a steep incline towards the use of seaborne transport.
The leader in shipping thus far has been Trafigura, the multinational commodity trader who already this year has shipped two cargoes full of Texas crude from a terminal in Corpus Christie to the Come by Chance refinery in the Canadian island of Newfoundland, Reuters reports.
Australian bank Macquarie is making similar cargo shipments from Nederland, Texas that will find their way to the same refinery.
Between the two oil traders, at least seven foreign-flagged tankers will make that same journey throughout the year, many of them for the first time.
The Jones Act
Cost effective and advantageous foreign-flagged tankers are the key to why Canada has become such a vital export location for U.S. crude oil.
Simply put, a foreign-flagged tanker is used in a business practice where a merchant ship owner will register a particular vessel using another sovereign state’s civil ensign, or national flag. And in this instance, it’s the one time you don’t want to be caught waving the American flag around.
It seems silly being that these are American waters, but what is coined as a ‘flag of convenience’ reduces operating costs and avoids strong regulations set forth by U.S. government.
Our analysts have traveled the world over, dedicated to finding the best and most profitable investments in the global energy markets. All you have to do to join our Energy and Capital investment community is sign up for the daily newsletter below.
Nearly a century ago, the Jones Act of 1920 was a good idea. It required any voyage between U.S. ports be manned and operated by and built in the U.S. It was to secure U.S. jobs and support prices for U.S. owners.
But those same advantages have become a hindrance to U.S. refiners, especially on the East Coast, where they look to take advantage of the shale boom coming out of Texas.
The price is four times as high for a U.S. owned and operated ship to take a similar voyage from Texas.
This is why the playing field is uneven and has the East Coast up in arms. It’s simply not fair, and a lot of resentment has been built up because of it.
There is pressure on lawmakers to make a change, but business is booming, and each day that goes by is another opportunity wasted for the U.S. to capitalize.
To sum it up, the Jones Act is a federal law that rewards foreign competition.
Valero Wins
It’s no skin off Valero’s back. They sold their last U.S. East Coast refinery three years ago.
And Valero isn’t the only one taking advantage of exporting Texas crude to Canada for refinement. BP (NYSE: BP) has been granted licensing to ship a similar amount. Shell Oil Company recently renewed its export license.
For now, that’s just the way it is, and while refiners on the East Coast will likely continue to suffer until certain laws are changed, trade with Canada is thriving, and a better fuel is being produced.
If you liked this article, you may also enjoy:
