Markets - Asia Pacific vs. U.S.

Canadian producers are keen to secure markets for their swelling volumes of synthetic crude oil (SCO). Western Canada's crude oil production is forecast to grow from 2.35 million barrels a day in 2005 to 3.37 million in 2015, and most of this growth will be comprised of SCO and bitumen produced from Alberta's vast oil-sand deposits.

SCO producers have been looking hard at the Asia-Pacific region, the U.S. Gulf Coast and California as importers of oil, and several pipeline projects, according to Abe Albert, St. Louis-based executive director of global refining and technical services, Hart Energy Publishing.
Still, there are issues with each market. At present, the U.S. has no spare conversion capacity available, and refiners will have to upgrade facilities to process additional Canadian crude, he says.

In the Gulf Coast region in particular, Canadian crude will not easily wrest market share away from Mexico, Venezuela and Saudi Arabia. These countries supply 40% of the U.S. Gulf Coast refining product, including most of the heavy sour crude requirements.

Canadian producers will have to offer significant discounts in addition to significant capital expenditures on pipeline and terminal infrastructure to gain entry into that market.
Meanwhile, Saudi Arabia has staked claims on the heavy-crude market in the Asia-Pacific region, and has the benefit of lower transportation costs to that part of the world than the Canadians.

California and the Midcontinent regions will provide the highest netbacks for the Canadian producers. "The U.S. Midwest should be a focus of their efforts, because the Midcontinent region provides the most attractive pricing alternative," Albert says, "taking into account the capital expenditures and marine transportation costs associated with the expansion of the Canadian synthetic crude supply orbit to the Asia-Pacific region."

Historically, bitumen-upgrading projects in Alberta have been very expensive, due to their massive sizes, the short construction seasons and high Canadian labor costs. For Canadian producers, another plus of U.S. markets is the broader financial benefits they can gain by shifting more processing south of the border.

"Canadian synthetic producers should consider investing in U.S. Midcontinent refineries. Such investments could reduce the processing complexity at the tar-sands projects," says Albert. This approach would maximize returns on capital.