One Third of the U.S. Gulf Coast Heavy Oil Market Could Be Supplied by Canada by 2020, IHS Markit Report Says

As supplies from Mexico, Venezuela and other competitors wane,
Canadian supply is increasing its share of refining runs in the world’s
largest heavy oil market

CALGARY, Alberta–(BUSINESS WIRE)–Supplies of Canadian oil sands heavy crude are increasingly being
refined on the U.S. Gulf Coast (USGC) and could top 1.2 million barrels
per day (mbd)—a full one-third of the region’s heavy oil refining
market—by 2020, says a new report by business information provider IHS
Markit (Nasdaq: INFO). Current runs of Canadian crude in the USGC
market are estimated to already be in excess of 800,000 barrels per day
(bpd), the report says.

Entitled Looking South: A Canadian Perspective on the U.S. Gulf Coast
Heavy Oil Market, the Oil Sands Dialogue report says that the
increasing volumes into the USGC refining market is coming at an
opportune time for both nations. Imports from Canada have exceeded
demand in their traditional import market—the U.S. Midwest—where they
have joined renewed U.S. domestic light oil to collectively displace
nearly all other imports.

The U.S. Gulf Coast is home to the world’s highest concentration of
heavy oil refineries and more than 90 percent of the heavy oil supplied
to them comes from imports. But supplies from some traditional sources
of these imports are waning. Over the past five years, production from
Mexico and Venezuela—two key oil sands competitors—has declined by
nearly 1 mbd. This is increasing the need for Canadian heavy crude oil
of similar quality, the report says.

The 800,000 bpd estimate for current runs of Canadian crude in the USGC
is already significantly higher than many other estimates. IHS Markit
believes that Canadian heavy oil imports may be simply “stopping off” at
Cushing, OK in the U.S. 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.

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

Increased volume in the USGC market would raise Canada’s already
sizeable reliance on the U.S. oil market, however. And while the United
States provides security of demand for Canada, there are risks to
overreliance, the report says.

The IHS Markit forecast assumes the completion of all the country’s
remaining long-distance export pipelines. If those projects were delayed
or Canadian or other heavy oil supply is more prolific than anticipated,
Canada may have to compete more aggressively for market share in the
United States—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,” said Birn. “In
a situation where the level of competition is high, Canadian crude may
have to adjust price to incentivize refiners to make additional
modifications and/or displace greater quantities of offshore imports.”

Alternative diversification strategies—such as customizing 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 concludes.

“The reality is that Canada—the 5th largest oil producer in the
world—maintains an almost singular reliance on one market,” Birn said.
“Such a situation is unique in the world and will always carry
associated concerns.”

About IHS Markit (www.ihsmarkit.com)

IHS Markit (Nasdaq: INFO) is a world leader in critical information,
analytics and solutions for the major industries and markets that drive
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government, improving their operational efficiency and providing deep
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of the Fortune Global 500 and the world’s leading financial institutions.

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