Canadian oil sands producers need security of demand
The rise of U.S. tight oil adds fresh impetus to search for new markets
There is a growing consensus that North American tight oil is big. Some even say the elusive goal of United States energy independence is within reach, but precisely how far of a reach remains open for debate. What appears certain is an ongoing decline in the amount of oil the U.S. needs to import.
Today, on a net basis, the U.S. imports more than eight million barrels per day of crude oil and refined products from foreign sources (more than one-quarter from Canada). Even with other factors shaping future oil demand – including new automobile fuel efficiency standards and a conservative (but likely) amount of petroleum displacement from biofuels, electricity and natural gas – the U.S. would still need more than eight million barrels per day of new domestic oil supply to eliminate all foreign imports.
Against that backdrop, total U.S. liquids production in 2020 – driven by tight oil supply growth – looks slim at around two to four million barrels per day higher than it was in 2010. While U.S. energy independence still looks unlikely, some regions are already bursting at the seams with new production. That makes finding new markets for Canadian oil sands important.
The U.S. Gulf Coast makes the most sense as a destination for Canadian output. The Texas-Louisiana corridor can process almost nine million barrels of crude per day, and almost half of the capacity is well suited for oil sands (both heavy and light). On paper, the region could absorb oil sands growth well beyond the next decade, but Canadian light crudes will face increasing competition from growth in U.S. output of tight (and light) oil.
The East Coast of Canada is another prospect for expansion of oil sands markets. While Canadian crudes can reach Ontario, refiners in Quebec and those to the east can only access limited amounts. In addition to supplies from Eastern Canada’s offshore, these refiners rely on about 700,000 barrels per day of foreign oil imports from places like the North Sea, West Africa and the Middle East. For now, the Quebec and Atlantic refiners are mostly set up to run light conventional crude oils (similar to tight oil). With the exception of limited volumes of synthetic crude oil, oil sands are not a good fit for these refineries. It would take billions of dollars to retool that region’s refineries to handle heavier feedstock.
Assuming the Canadian East Coast is reached, the U.S. East Coast would also be close at hand. Refineries there are geared up for light crudes with similar capacity to their northern counterparts (although capacity in the U.S. northeast has been shrinking). Even so, the combined capacity on the Canadian and American east coasts is about one-fifth the size of the U.S. Gulf Coast.
A Pacific-bound pipeline would open Asian and Californian oil markets. California has more refining capacity than the east coasts of Canada and the U.S. combined. The region already processes a sizable volume of heavy crude, but the state’s evolving low-carbon fuel standard policy could potentially curtail the consumption of higher-carbon crudes – like oil sands.
And then there is Asia. The combined refining capacity of China, South Korea, Taiwan and Singapore eclipses what’s available on the U.S. Gulf Coast. And unlike the U.S., demand in Asia is growing. Within the decade, China’s demand for light refined products should more than double. While the installed refining capacity in Asia is mostly geared for light crude feedstock, some heavy crude processing capacity already exists, and – most importantly – plenty of new refineries are yet to be built. If oil sands could reach Asia, new refining capacity could be built – a priority, given the region’s growing reliance on Middle East supplies, and mounting pressure to diversify crude suppliers.
The United States will likely remain the largest customer for Canadian oil. But considering the outlook for rapid oil sands growth, along with rising volumes of tight oil, Canadian producers need options. This is also important for Canada, considering the contribution of oil to the country’s gross domestic product. While Americans seek security of oil supply, Canadians need a different kind of security – of demand. New markets are a part of the answer.