A recent report from IHS CERA analyzed the role of Canadian oil sands in the US market. Currently, the US is practically the only market for Canadian crude oil. Although Canadian oil is exported to many US regions, the majority of exports, including oil sands, go to the US Midwest. With the two recent pipeline expansions from western Canada to the US Midwest commissioned in 2010 (Enbridges Alberta Clipper at 450,000 bpd and TransCanadas Keystone at 590,000 bpd), new oil sands supply will be consumed in this region (Fig. 1).
| Fig. 1. Current and proposed crude flow from Western |
Canada to the US Midwest and Gulf Coast.
Crude supply. Crude oil supply in the US Midwest is nearing a saturation point. IHS CERA projects that the bulk of oil sands export growth to the US Midwest will be a product called dilbit (diluted bitumen), a heavy crude oil. To prepare for increasing heavy crude supplies, a number of Midwest refiners are adding sophisticated coking upgrading units to their refineries, enabling them to accept growing dilbit volumes. The combination of new pipeline capacity and additional refining capacity geared to accept dilbit means that, in the near term, the Midwest market can absorb additional oil sands production. However, considering the potential for oil sands production to double in the next decade, by 2015 oil sands dilbit exports will likely exceed the Midwest refiners ability to process the heavy crude. Its possible that some Midwest refiners could further upgrade their refineries, increasing the market for dilbit. But growing Canadian supplies to the US Midwest have coincided with a renaissance in light crude oil production in the region, led by the Bakken tight oil play, mainly in North Dakota but also extending into Montana. Total production from the formation has grown from less than 10,000 bd in 2003 to an estimated 400,000 bd in 2011, making North Dakota the fourth-largest oil-producing state in the US.
IHS CERA estimates that production from the play could reach at least 800,000 bd by 20162018. Production elsewhere in the Midwest is also rising: output in Oklahoma and Kansas has increased by about 10% since 2007. Consequently, with ample and growing light domestic crude supplies in the region, it is unclear whether refiners would make costly upgrades to process more heavy crude supply from Canada.
Pricing. A sign of the need to expand pipeline capacity out of the Midwest, and of the oversupply of light crude in the region, is a lower price for West Texas Intermediate (WTI) crude oil relative to other major crude oils, including those traded on the US Gulf Coast and elsewhere in the world. WTI, priced at Cushing, Oklahoma, is the oil price that appears in the daily news. Historically, WTI has been priced at a premium to other crude oils. The US Midwest was short of crude oil, and a higher price was needed to attract supply to refineries in the region and to reflect the high quality of WTI. Consequently, pipeline infrastructure was built to transport oil to the Midwest, but not from the Midwest. Cushing pipeline connections do not flow south to the US Gulf.
In a break from historical trends, there were times from 2006 to 2010 when WTI was priced several dollars below Light Louisiana Sweet (a crude oil produced in the US Gulf Coast) and Brent crude oil (a global price benchmark produced in the UK sector of the North Sea). But, in recent months, the WTI discount has ballooned to as much as $18 per barrel as landlocked supply growth overwhelmed the Midwest crude oil market. WTI will remain vulnerable to significant discounts to other crude oils until more export capacity is developed to transport crude out of the Midwest to the US Gulf Coast.
The Keystone XL project could provide some relief for the oversupply of light crudes in the US Midwest. First, some Canadian light synthetic crude oil (SCO) could bypass oversupplied light crude markets in the Midwest and go directly to the US Gulf Coast.
Second, the project could transport some US domestic production from both Cushing and the Bakken to the US Gulf Coast.
What if increased oil sands access to the US market is derailed? Apart from the loss to consumers of a more dynamic pipeline network, Canadian oil sands producers would likely turn to Asia as a new export market, and US Gulf Coast refiners would continue to draw on current suppliers. However, some current suppliers, such as Mexico and Venezuela, are struggling to maintain production, and other suppliers are needed. HP