US refinery investments align with oil sands supplies to 2015

Supply of Canadian oil sands products will increase by 2 million b/d between 2007 and 2015; half of this growth will be in Canadian heavy crude blends. A recent study shows that the export pipeline infrastructure and US refinery capacity will be able to handle forecast additional supplies of Canadian crude during 2007-15. Planned export pipeline infrastructure should keep pace with forecast additional supply of oil sands products to 2015; export pipeline capacity will increase by 2.1 million b/d. Current capacity tightness should be resolved once expected new pipelines start up in 2008 and 2009. By the end of 2015, spare capacity will reduce, suggesting the need for additional export capacity shortly after 2015.

Refinery projects targeting Canadian heavy blends that we expect to proceed are aligned with our forecast of additional supply: Canadian heavy blends supply will increase by 1 million b/d by 2015, and projects that are planning on processing heavy blends will increase by 1.1 million b/d.

Flexibility in Canadian heavy blends supply vs. refinery capacity will be available only after commissioning of the proposed Texas Access pipeline to the US Gulf Coast (post 2012). At that point, heavy-oil capacity in the region could be used to process Western Canadian blends if projects do not progress as planned in US Petroleum Administration for Defense District (PADD) 2.

Currently disclosed project costs reveal that pipeline companies and US refiners plan to invest more than $31 billion by 2015 to export and distribute oil sands products as well as process them in the US refining system. This figure excludes any investments in internal pipelines in Alberta, the Canadian refining and upgrading system, and undisclosed refining investments.

Our study shows that pipeline availability will largely determine the actual allocation of crude supplies by 2015:

• Canadian heavy blends. Most additional Canadian heavy blends will be refined in PADD 2 by 2015, with remaining supplies processed in new markets of the US Gulf Coast or supplied from Cushing, Okla.
• Synthetic crude oil. Most additional SCO will be shipped to the US Pacific Coast by 2015; pipeline constraints will limit transfers to PADDs 2 and 3. SCO that will make its way to the Midcontinent will be run in PADD 2 and US Gulf Coast refineries.

This study uses Wood Mackenzie’s refinery evaluation model, which provides independent appraisal of global refinery competitive position.

Canadian crude

Canada ranks as having one of the world’s largest oil reserves, after only Saudi Arabia and potentially Venezuela. The Albertan oils sands deposit has in-place resources of about 1.75 trillion bbl, of which about 10% are recoverable with current technologies.

Projected growth of Alberta’s oil sands output is triggering investments in US midstream and downstream sectors in anticipation of the new production. In Canada, oil producers have announced production projects as well as upgraders that will supply growing volumes of bitumen and SCO.

This has encouraged Canadian and US pipeline companies to propose new midstream infrastructure to deliver the production to market. US refiners have announced projects in preparation for the incoming flows from Western Canada.

This article analyzes the effect of pipeline and refinery investments during 2008-15, focusing on:

• Who is expected to invest and where?
• How will the projects fit together?
• How will the medium term look?

Upstream outlook

Strong growth in oil sands production during the past few years has been an important contributor to global supply and provided the US with the prospect of a secure source of supply from Canada. Bitumen production from Alberta’s oil sands during 2007-15 will increase to 3.1 million b/d from 1.2 million b/d.

This outlook is based on an assessment of individual projects that are currently in production or likely to come on stream. It also anticipates delays to projected start-up dates and less than full utilization rates due to anticipated technical problems.

A significant portion of bitumen production will be upgraded to SCO. Currently there are four upgraders in Alberta and Saskatchewan, operated by Suncor, Syncrude, Husky Energy, and the Athabasca Oil Sand Project. Canadian Natural Resources Ltd. and OPTI-Nexen have invested in new upgraders, scheduled for start-up in 2008. In addition, another 11 upgraders and one refinery conversion have been announced, projected to begin operating before 2015.

In reality, several of these projects including proposed expansions of existing upgraders are likely to be delayed, rescaled, or canceled due to increased cost, complexity of regulatory requirements, engineering and construction material shortages, as well as revisions to forecasts for bitumen output.

Nonupgraded bitumen is blended with diluents, synthetic oils, and conventional crude to reduce its viscosity before being pumped to the refineries. Resulting Canadian heavy blends and SCO supply will grow to 3.7 million b/d by 2015 from 1.7 million b/d in 2007.

Existing pipelines

The existing pipeline infrastructure to deliver oil sands crude to foreign markets consists of export pipelines and the internal distribution network in the US (Fig. 1). Most of the Canadian crude is exported to US markets through four major trunk-line systems:

• Enbridge-Lakehead system is the main route for Western Canadian crude exports to the US. It links Alberta with PADD 2 and also with Ontario. This system connects to downstream pipelines in Illinois, which extend to Cushing and the US Gulf Coast.
• Express-Platte system links Alberta with PADD 4 and, in a limited way, to PADD 2.
• Western Corridor connects the Rangeland and Cenex pipelines in Western Canada with PADD 4.
• Trans Mountain pipeline is the only system that links Alberta with the Pacific Coast (Vancouver in Canada and Anacortes in the US).

These trunk lines transported about 1.7 million b/d of Canadian crude, including both conventional crude and oil-sands products, to the US in 2007. They are unable, however, to accommodate the projected increase in heavy oil supply from Western Canada.

New pipeline investments

There are many proposals to expand and extend the pipeline infrastructure to meet growing supplies from Western Canada in the short and medium term. In many cases, the decision to invest will be subject to support from pipeline users and regulatory approval, leaving considerable potentials for delay.

Fig. 1 shows the existing and proposed pipelines to export and distribute Canadian crude.