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Canadian crude increasingly attractive for US Gulf Coast refineries as market landscape changes

Canadian crude increasingly attractive for US Gulf Coast refineries as market landscape changes

Photo by Duane Daws

10th April 2018

By: Henry Lazenby

Creamer Media Deputy Editor: North America

     

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VANCOUVER (miningweekly.com) – Canadian crude oil could account for up to one-third of the US Gulf Coast (USGC) region’s heavy oil refining market by 2020, a new report by market research and consultancy firm IHS Markit has found.

According to the analyst’s latest research, supplies of Canadian oil sands heavy crude are increasingly being refined on the USGC and could top 1.2-million barrels a day by 2020.

Current runs of Canadian crude in the USGC market are estimated to already top 800 000 bbl/d, the report, entitled ‘Looking South: A Canadian Perspective on the US Gulf Coast Heavy Oil Market, the Oil Sands Dialogue’ states.

According to IHS, the increasing volumes into the USGC refining market are coming at an opportune time for both nations. Imports from Canada have exceeded demand in their traditional import market in the US Midwest – where they have joined renewed US domestic light oil to collectively displace nearly all other imports.

The USGC has the world’s highest concentration of heavy oil refineries and more than 90% of the heavy oil supplied to them comes from imports. But supplies from some traditional sources of these imports are waning, the report found. Over the past five years, production from Mexico and Venezuela – two key oil sands competitors – has declined by nearly one-million barrels a day, placing increasing focus on Canadian heavy crude oil of similar quality, the report says.

IHS believes Canadian heavy oil imports may be simply "stopping off" at Cushing, Oklahoma, in the US Midwest – where they have already exceeded demand in that market – before being rerouted to the Gulf coast. Due to the way imports are often tracked, these imports would be counted as having been delivered into Cushing rather than to their final destination, IHS cautions.

“The USGC is the most logistically approximate and technically suited to receive increasing volumes of heavy oil from Canada. With supply overtaking demand in the US Midwest and traditional sources of offshore heavy supply to the Gulf Coast in decline, Canadian supply has become an obvious and attractive alternative,” IHS executive director and head of the Oil Sands Dialogue Kevin Birn comments.

SINGULAR RELIANCE
However, the increased US demand comes with a caveat, in that it would only raise Canada’s already sizeable reliance on the US oil market. And while the US provides security of demand for Canada, there are risks of overreliance, the report finds.

The IHS forecast assumes the completion of all of Canada's remaining long-distance export pipelines. If those projects were delayed or Canadian or other heavy oil supply is more prolific than expected, Canada may have to compete more aggressively for market share in the US – something it has not yet had to do.

“Although Canadian imports are of similar quality as Latin American crudes, they are not identical. There is a point when more extensive modifications will be required to better tailor facilities to accommodate greater volumes of the Canadian heavy crude,” says Birn.

“In a situation where the level of competition is high, Canadian crude may have to adjust price to incentivise refiners to make additional modifications and/or displace greater quantities of offshore imports.”

Alternative diversification strategies – such as customising oil sands blends or developing upstream partial processing technologies that would result in the marketing of a greater range of crude oil qualities – can help mitigate the risks. However, given the scale of Canadian heavy oil supply today and anticipated growth, these solutions would not remove the risk and would still take considerable investment and time, the report states.

“The reality is that Canada – the fifth largest oil producer in the world – maintains an almost singular reliance on one market. Such a situation is unique in the world and will always carry associated concerns,” Birn advises.

Edited by Creamer Media Reporter

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