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Understanding the Upstream-Downstream Dynamic

September 2017 - The Canadian oil and gas sector has been stressed over the last few years due to low commodity prices. Luckily, the sector is also quite resilient.

In Alberta’s Imminent Pipeline Capacity Dilemma, the Canadian Association of Petroleum Producers’ (CAPP) annual Crude Oil Forecast, Markets and Transportation report was referenced, wherein it projected Western Canadian crude oil production will grow to 5.4MMbopd by 2030, driven by a 53% increase in oil sands production from today’s rates. Further, it was deduced that the majority of new oil production would be transported in the form of raw bitumen.

Who wants to purchase additional production volumes from Canada?

It’s certainly an interesting question to ask, and it’s a relevant question because not all crude oil is made equal.

Alberta bitumen is dense and is known for its high sulfur and high metals content. In order to process heavy sour crudes such as Canadian bitumen, refineries need to be configured with highly capital intensive equipment such as cokers and ebullated bed hydrocrackers. If a refinery processes heavy sour crude, they demand deep pricing discounts to make up for the expensive equipment and increased operating costs.

Fortunately, many Gulf Coast refineries have been configured to accept heavy crudes. Back when players such as Valero, Exxon, Marathon, and Motiva built their refineries, they did so under the assumption of sourcing and processing cheap heavy crude feedstocks from places such as Venezuela, Mexico, and Saudi Arabia.

It is worth noting that despite having ample light oil supply from the current shale oil boom in Texas, many of the existing Gulf Coast refineries continue to process heavy crudes simply due to the significant cost barriers associated with reconfiguring their operations to handle different feeds. Any future reconfiguration would be a heavily weighted decision.

Unfortunately, while global crude demand is forecast to increase to nearly 100MMbopd by the end of 2018, there is limited evidence to suggest that future refining capacity will be built to handle additional heavy feedstock volumes. Canada currently accounts for only 4% of the global crude supply, and it may be difficult for refiners to justify building new, expensive heavy oil processing facilities, given the rise of light shale oil. This places Alberta at the mercy of foreign refiners since Alberta's growth in production will come predominantly from the oil sands.

In addition, an emerging and potentially troubling trend may exacerbate the problem. Political and economic instability in Venezuela has ravaged its oil industry and has severely impacted the country’s ability to export heavy crude to a number of Gulf Coast refineries. According to Reuters, Venezuela’s crude output has fallen by nearly 750Mbopd since 2012, and this has forced refiners to react. In response, Valero and Marathon have both announced plans to adjust their feedstocks to lighter blends as they try to soften the impact of the supply disruption.

Canadians should recognize that adding additional pipeline capacity alone does not address the underlying issue of having a limited number of customers that can process heavy oil. Canadians also need to be cognizant that United States refiners are not afforded the luxury of being able to wait years for new pipelines to be built in order for Canadian crude to fill the Venezuelan void.

So what can be done?

Alberta energy stakeholders need to be proactive and contemplate solutions for having only a limited number of foreign refineries comprise the demand base for bitumen. Alberta energy stakeholders can assess ways in which they can develop a flexible product within the province that could be exported to any refinery, regardless of processing configuration. In doing so, Alberta's oil export potential could be opened to the entire world.

About Well Resources

Well Resources is an Alberta-based technology company with local offices in Calgary and Edmonton. Its areas of focus are in the energy and life sciences sectors, where Well Resources develops and licenses green technologies that promote effective resource utilization.


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Well Insights is a series that addresses subjects relevant to civil society, governments, and industry. The discussions focus on rethinking the way we approach difficult issues and providing transformative solutions as they all relate to the topic of effective resource utilization.

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