Alberta heavy crude oil opportunity in India thanks to Iran sanctions

India’s Jamnagar refinery, one of the world’s largest

Trump’s America becoming increasingly protectionist, Asian markets growing, will Canada continue to dither on opening new markets?

Alberta may have trouble getting heavy crude oil to market, but demand for the product continues to grow as supplies from competitors – especially Iran, Venezuela, and Mexico – shrinks. Demand from India, in particular, is growing because of pressure from the Trump Administration to end imports of Iranian heavy crude. Is this the perfect opportunity for Canada to displace its rivals in the world’s fastest growing market?

“Our focus is to work with those countries importing Iranian crude to get as many of them as possible down to zero by Nov. 4,” a US State Department official recently told Reuters.

The US will provide India with some of those lost barrels, especially if China imposes tariffs on American oil as part of its escalating trade war with President Donald Trump, but the US light crude is not a perfect replacement for the heavier Iranian product.

“US light barrels are also much lighter than crude considered to be ‘light’ internationally (US lights can be 40-55+ API….international lights are 34-38 generally),” Infodrilling research manager Bernadette Johnson said in an email.

Could the Indian refineries replace Iranian heavy crude with Alberta heavy?

“As for Iranian crude…they have light and heavy with commonly known characteristics.  Iranian heavy is not as heavy as Canadian heavy, and its not as high in sulfur content, so comparing the crudes isn’t necessarily apples to apples,” she said.

“India is definitely a good fit for Canadian barrels….so long as Canada can get them there.”

Johnson says Reliance Industries Ltd.’s Jamnagar refinery, the world’s largest largest, prefers a 26 API crude (the lower the API number, the heavier the crude; 26 is quite low). Refineries set up for heavies can refine lighter barrels, but the opposite is not true, a refinery tooled for lights cannot typically handle heavy barrels.

“The units that are key for processing heavy barrels are cokers and hydrocrackers, and many ‘light oil’ refineries don’t have them or they are too small,” she said.

“For a refinery to accept a non-optimal barrels (e.g. a ‘heavy’ refinery to accept light barrels), they would have to be discounted to account for the inefficient refining and different mix of refined products that result.”

Lighter barrels in general produce more gasoline feedstock, and heavy barrels produce more distillates and fuel oils.

“There could be an issue in India if the products produced from light barrels do not match their demand needs,” says Johnson. “I do agree that Canadian heavy barrels are a better substitute for Iranian barrels in some Indian refineries than the lightest US crude exports.”

Kevin Birn, IHS MarkIt director of the Oil Sands Dialogue, says there is a bigger picture to be considered than just declining Iranian heavy crude oil shipments to Indian refineries.

“The heavy oil market as a whole has tightened since the downturn began,” he wrote in an email. “In part this was because of majority of OPEC restraint coming from heavier grades of oil, but also ongoing gradual decline of Mexican heavy oil output and the accelerated plummet of Venezuelan output.”

Though Canada is physically restrained from meeting Asian demand at this point in time, he says, the tightening of the heavy oil market has affcted the value of heavy versus light crudes.

“We have seen a tightening of the price difference between these two categories of crudes.  Though Iranian heavy is not as heavy as Canadian heavy oil, any additional reduction in heavy supply should be expected to further tighten the heavy oil market and could benefit alternative sources of supply.”

Indian refineries have responded to the tightened heavy crude market by blending heavy and light crudes. They began testing US light crudes last year and volumes climbed as they became confident the blends would work, according to Reuters.

Even as British Columbia critics of the Trans Mountain Expansion pipeline continue to insist there is no market in Asia for Alberta oil sands’ diluted bitumen, geopolitical shifts that affect supply of heavy crude oil from Alberta’s competitors is putting the lie to that argument.

Meanwhile, back in North America, Trump’s tarrifs against Canadian steel and aluminim exports continue to create uncertainty about north-south trade flows.

How long before the President targets Canadian crude oil?

Will Canada pass up the long sought after opportunity to diversify export markets at a time when its traditional buyer is becoming increasingly protectionist and new customers face a shortage of heavy crude supply?


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