An influx of crude
Gulf Coast refineries are likely to see a rise in volume from Canada’s oil sands.
Gulf Coast refineries may soon see a boost in crude volumes as Canadian oil sands production finally ramps up, according to the Chicago investment research firm Morningstar.
Production of heavy oil from western Canada’s oil sands is rising as projects — many started long before the two-year-old oil price crash — come online this year and the industry recovers from wildfires that hit Alberta’s oil sands region last year. The Canadian Energy Research Institute expects production to increase by 595,000 barrels per day this year and by another 203,000 per day in 2018.
Midwest refiners added capacity to handle more heavy Canadian crude, but are now maxed out, said Morningstar analyst Sandy Fielden. The U.S. Gulf Coast is the “most obvious market” for the rest of the northern oil, he said.
Despite the boom in light shale oil in Texas and other states, most of the refineries in Texas and Louisiana are configured to process heavy crude that is not produced in the U.S. For years, they have relied mostly on expensive Latin American oil from Mexico and Venezuela.
Western Canada is projected to increase its oil sands production by nearly 1 million barrels a day by 2020, even as international companies pull out of Alberta to focus on more efficient and less costly fields such as West Texas’ Permian Basin. Operators, such as Houston’s Marathon Oil Corp. have sold off their holdings in the sands there, leaving primarily Canadian drillers.
ConocoPhillips announced last month it was selling its most valuable oil sands assets to Calgarybased Cenovus Energy as part of a $13.3 billion deal. But Canadian companies like Cenovus say they have the local knowledge and technology to exploit the oil sands, which rank among the world’s biggest crude reserves, and profit even at relatively low prices. The rig count in Canada, including gas drillers, has more than tripled over the past year.
Increased production of Canadian oil, which is cheaper that Latin American crude, could provide an opportunity for Gulf Coast refiners to cut their supply costs and boost profit margins, which have been squeezed over by a flood of gasoline on the market, analysts said. The key to making the most of this opportunity, analysts added, is the construction of new pipelines.
“The need for new pipelines departing Western Canada has not diminished with lower oil prices, quite the opposite,” said Kevin Birn, energy director for the research IHS Markit. “Canada remains a growth story with production volumes increasing since the oil price collapse.”
“Canada remains a growth story with production volumes increasing …” Kevin Birn, IHS Markit