Exclusive: Enbridge first to confirm re-exports of Canadian crude via U.S.

NEW YORK Sat Apr 5, 2014 12:37am EDT

Enbridge President and CEO Al Monaco speaks during the IHS CERAWeek energy conference in Houston March 6, 2013. REUTERS/Richard Carson

Enbridge President and CEO Al Monaco speaks during the IHS CERAWeek energy conference in Houston March 6, 2013.

Credit: Reuters/Richard Carson

NEW YORK (Reuters) - Enbridge Inc (ENB.TO) has become the first company to confirm plans to re-export Canadian oil from the United States, a move that could fuel debate over U.S. trade policy and intensify opposition to new oil sands pipelines.

Its U.S. subsidiary Tidal Energy Marketing has received a U.S. government license to export "limited quantities" of Canadian-origin oil from a U.S. port, Enbridge said, confirming weeks of market rumors and speculation about such shipments. Market sources say they expect the first 40,000-tonne cargoes to set sail from Texas ports to Europe later in April.

Re-exports from the United States are rare but allowed as an exception to a contentious ban on exports of its own oil imposed since the Arab oil embargo of the 1970s.

Enbridge plans to export "less than 1.5 percent" of its total U.S. shipments, Terri Larson, an Enbridge spokeswoman, told Reuters in an email. That would come to under 36,000 barrels per day (bpd) of the pipeline giant's 2.4 million bpd system, a tiny amount of oil in global terms but a volume that may grow amid rising North American production.

Larson declined to provide specifics on the port of departure, the destination or the type and volume of oil involved, saying this is commercially sensitive information.

Reuters reported earlier this year that the U.S. government granted a number of licenses to re-export foreign crude to Europe. But Enbridge, which operates one of only two major pipelines that can carry Canadian crude south to the U.S. Gulf Coast, was the first firm to publicly confirm it holds a re-export permit and intends to use it.

Late on Friday, leading U.S. independent refiner Valero Energy Corp (VLO.N) also confirmed that it had received a license last month to re-export Canadian crude, likely destined for its Jean Gaulin refinery in Quebec, whose rail shipments were blocked by severe weather.

"The license also allows us to export to the U.K., but the economics of that aren't good right now. The primary aim is to make sure the Quebec refinery is well-supplied with North American crude," company spokesman Bill Day said.

The re-exports are bound to draw more attention to these restrictions as U.S. oil producers who are unable to sell their discounted domestic crude at global prices put mounting pressure on the Obama administration to end the ban as domestic output reaches a 26-year high.

The United States does routinely grant exceptions for sales of U.S. crude to Canada and for the re-export of foreign crude so long as it is kept completely separate from domestic oil.

They may also anger environmental groups that oppose growing oil sands production in Canada, and the Keystone XL pipeline, which they say will help tar sands oil reach a global market.

Earlier this week, Senator Lisa Murkowski, a Republican from Alaska, urged the government to bypass current regulations by allowing condensate exports.

DESTINATION EUROPE?

Analysts say re-exports will open up new markets for Canadian oil, especially with the recent startup of pipelines such as Enbridge's Seaway and TransCanada's (TRP.TO) Gulf Coast line, both connecting Cushing, Oklahoma, to the Gulf Coast.

Enbridge says "virtually" all of the crude oil moving on its 50-percent owned 400,000-bpd Seaway pipeline, which terminates at a terminal in Freeport, Texas, is for U.S. domestic use.

"This is a viable opportunity for Canadian barrels to get out into the wider world," said Martin King, an analyst with FirstEnergy Capital in Calgary.

"It's another source of revenue other than big brother United States," he added.

Valero, which said a month ago that it had applied for the re-export permit, said it has been supplying crude to its 265,000 barrel-per-day Quebec refinery from western Canada by rail, but that severe winter weather had blocked some shipments.

Day said it would have been easier for Valero to ship the crude to the Gulf Coast and then ship it back to Quebec via tanker.

As Canadian oil traders point out, the logistics of re-exporting oil sands via the United States were likely to be complicated. The oil has to make its way to a U.S. port through Canada's congested pipeline network and volumes will be constrained by total pipe and rail capacity.

Enbridge has to ensure that no U.S. oil is mixed in with the Canadian barrels destined for re-export. In addition, the condensate used in blending to help the viscous oil sands bitumen flow through the pipelines must also come entirely from Canada.

A number of companies have export licenses similar to those Enbridge holds but will not use them until the U.S. government revisits its current stance on exports, one trader said.

LOTS OF TALK, LITTLE EVIDENCE

Oil traders have been eyeing Enbridge's rumored shipments since late February. Many expect exports of up to 40,000 tons of heavy oil to leave Texas ports as early as this month and go to refiners in Italy and Spain that can process heavy crude oil.

The Department of Commerce has granted three licenses to re-export oil to the United Kingdom, four to Italy and one to Germany since last year, according to data Reuters obtained through Freedom of Information Act requests.

These are the first permits to ship oil to Europe since 2008, and were approved by the department's Bureau of Industry and Security (BIS), the designated gatekeeper for such licenses.

The bureau does not reveal names of companies with approved licenses and declined to discuss specific permits for this story.

There were no approved licenses for re-exports to Spain in documents reviewed by Reuters. So far, U.S. customs data compiled by PIERS does not show crude oil shipments leaving U.S. ports for Europe.

Critics of the Keystone XL pipeline contend allowing re-exports of Canadian oil from the United States undercuts President Barack Obama's pledge to protect the climate.

However, Keystone's owner TransCanada Corp (TRP.TO) has said it will not re-export Canadian oil sands from the pipeline. The project, delayed by five years, is awaiting a decision from Obama. The pipeline will help replaced 8 million to 9 million bpd of "unstable foreign oil" with American and Canadian oil, a spokesman said.

(Additional reporting by Ron Bousso in London, Erwin Seba in Houston, and Shruti Chaturvedi in Bangalore; Editing by Jonathan Leff, Nick Zieminski and Lisa Shumaker)

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