Markets - Connecting the Oil Sands to Cushing

Cushing is a major hub in oil supply connecting the Gulf Coast suppliers with northern consumers. Cushing is famous as a price settlement point for West Texas Intermediate on the New York Mercantile Exchange (NYMEX) and has been cited[1] as the most significant trading hub for crude oil in North America. Signs made of a pipe and valve on the major highways near town proclaim Cushing to be the "Pipeline Crossroads of the World", and the town is surrounded by several tank farms.

Project OVERVIEW
The 3,456-kilometre (2,148-mile) Keystone Pipeline will transport crude oil from Hardisty, Alberta to U.S. Midwest markets at Wood River and Patoka, Illinois and to Cushing, Oklahoma. The Canadian portion of the project involves the conversion of approximately 864 kilometres (537 miles) of existing Canadian Mainline pipeline facilities from natural gas to crude oil transmission service and construction of approximately 373 kilometres (232 miles) of pipeline, pump stations and terminal facilities at Hardisty, Alberta. The U.S. portion of the project includes construction of approximately 2,219 kilometres (1,379 miles) of pipeline and pump stations.

The Keystone Pipeline will have an initial nominal capacity of 435,000 barrels per day in late 2009 and will be expanded to a nominal capacity of 590,000 barrels per day in late 2010. Keystone has contracts with shippers totalling 495,000 barrels per day with an average term of 18 years.

The question to be asked is can the oil sands production flowing into Cushing be blended to create West Texas Intermediate. This will increase the supply of WTI and decrease the price of WTI.

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.

Markets - Refining SCO

The bitumen portion of the synthetic crude oil is like tar. Both gravity and viscosity are high. It contains significant aromatic and asphaltene compounds. It is high in sulfur, nitrogen, and metals and contains highly corrosive organic acids. It must be diluted or upgraded in order to ship.

Bitumen is not a good fit with refineries designed for light sweet crudes. There is significant hydroprocessing of converted material because it is H2 deficient. Bitumen also produces alot of coke and sulphur. Synthetic crude oil only works well in refineries designed for synthetic crude oil (SCO). In order to be SCO friendly, refineries need the following:

• Serious hydroprocessing capability.
• Metallurgy upgrades.
• Ability treat for air, water pollution and manage byproduct disposal
• Conversion capability for bitumen blends or SCO.

Markets - Pipeline Expansion

A February 2005 report from the Canadian Association of Petroleum Producers on oil pipeline expansion describes how western Canada has sufficient pipeline capacity to move crude oil to
markets for the next several years. The total excess capacity across the three major
trunk line systems exiting western Canada is about 300,000 b/d. The majority of western Canada’s crude oil supply continues to be sold into eastern markets, primarily in the U.S. midwest. These primary market areas are accessed through the Enbridge pipeline system. Crude oil shipped to secondary markets, such as cargoes moved off the west coast, generally arise after the available capacity on the Enbridge system is fully subscribed, i.e., the Enbridge system is in apportionment. The distinction between primary and secondary markets is important in assessing future pipeline capacity requirements. From a planning perspective, adequate pipeline capacity out of western Canada is defined as sufficient space to avoid sustained apportionment on the Enbridge system.

A comparison of the forecast growth in crude oil production and supply versus available Enbridge pipeline capacity shows a potential shortfall as early as 2007-08. At that time, Enbridge is forecast to be apportioned thus displacing barrels into secondary markets. To accommodate this near term shortfall in capacity on Enbridge, small scale expansion and debottlenecking options are available for the Enbridge system to boost capacity by about 150,000 b/d. Other pipelines also have potential to implement small system expansions. Overall, these capacity increases are forecast to provide sufficient aggregate pipeline capacity until 2010-11.

The production forecast for light crude oil and equivalent (synthetic) shows significant growth. However, the combination of declining conventional light oil production and synthetic supplies shipped as diluent in heavy crudes (Synbit) tend to mitigate the net growth in supply so that existing light oil pipeline capacity is forecast to be sufficient until 2015. The future increases in pipeline capacity are required primarily to accommodate growth of new supplies of Synbit and Dilbit, i.e., medium sour and heavy crudes.

Markets - Western Canadian Future Oil Supply

Western Canada’s crude slate has been dominated by light and heavy crudes over the last 15 years. The next decade will see a marked shift in this trend.


Heavy crude oil production, including bitumen from oil sands, traditionally has relied on condensate as the source of diluent to reduce the viscosity and meet pipeline specifications for transport. The primary source of condensate has been pentanes from western Canada’s growing natural gas production. Heavy crude oil and bitumen blended with condensate are generally referred to as Dilbit blends.


In recent years, slower natural gas growth, a shift to producing drier gas with less pentanes and competing demands for natural gas liquids have constrained available supplies of condensate. Escalating prices and insufficient condensate supplies combined with growing supplies of heavy/bitumen crude that need a source of diluent have forced producers to examine other options. As a replacement for condensate, producers of oil sands bitumen are starting to use light synthetic crude oil as an alternative source of diluent for blending to pipeline viscosity requirements. This trend to use synthetic crude has led to the evolution of a synthetic-bitumen blend referred to as Synbit.


Whereas traditional Dilbit blends approximate a 25:75 percent diluent-to-crude oil ratio, Synbit blends are closer to a 50:50 mix. The higher proportion of light products has changed the composition of the resulting crude oil blend. From a refining perspective, Dilbit blends are predominantly heavy. Synbit blends, however, look more like medium sour crudes to a refinery.


As a consequence of this emerging trend in blending, western Canada crude supplies will no longer be predominantly light and heavy. The growth in medium-like crudes is forecast to become an important component of the overall crude slate available to refiners.

Markets - Access and Capacity

The primary consideration in assessing the alternative routings for new pipelines is the potential market that can be served.

Canadian crude oil has historically been consumed in five market areas: the prairie provinces, Ontario, B.C./Washington State, U.S., Rocky Mountains, and U.S. midwest. As depicted in the chart, eastern markets dominate the flow of crude. For the predicted growth in crude supply, producers will need to expand their market horizons to more distant markets.

Western Canada’s crude oil marketing is currently focused on four core markets: western Canada, Ontario, the U.S. midwest (upper PADD II) and the U.S. Rockies (PADD IV).

In 2003, these core market areas represented an aggregate demand of over 3.0 million b/d. The demand in these traditional core markets, however, has been predominantly light and heavy, reflecting the composition of the historical crude slate developed and supplied by producers.

In addition to these coremarkets, crude oil supplies are occasionally also delivered into extended markets, the lower midwest (PADD II) and Washington State (PADD V) regions. Market demand in these areas tends to be seasonal or when pricing parity shifts create competitive opportunities for Canadian crudes. The extended market represents a potential crude oil demand exceeding 2.0 million b/d.

Much of the demand in the extended markets is for light and medium sour crudes. Historically, western Canada has not produced large volumes of medium crudes. The potential demand for medium crudes in these markets offer significant opportunities related to the growing supplies of oil sands Synbit, which can be blended to resemble a medium crude.