Heavy crude oil from western Canada available for export to the US in 2035 could be as high as 3.9 million b/d or as low as 2.5 million b/d, depending on pipeline developments, says the Canadian Energy Research Institute.
In a study that also analyzes netbacks to Canadian producers for heavy crude sold on the US Gulf Coast, CERI estimates about 40% of exports to the US would reach refiners in that area if able to overcome transportation constraints.
The study notes that Venezuela and Mexico supplied an average of 1.5 million b/d of the 3.2 million b/d of heavy crude imports at the Gulf Coast last year. But that average has declined by more than 1 million b/d over the last 10 years.
Although movement of bitumen blends and heavy crude from Canada to the Gulf Coast has increased recently via the existing Enbridge pipeline system rail, and barge, full displacement of Venezuelan and Mexican supply would require more pipeline capacity, the study notes.
Until recently, most heavy material from Alberta and Saskatchewan moved to refineries in the US Midwest. But pipeline construction and reversals have opened more than 1.2 million b/d of transport capacity from the Midwest-especially Cushing, Okla.-and the Gulf Coast.
As production of heavy crude from western Canada increases to an expected 4.7 million b/d in 2035 from 2.6 million b/d last year, CERI says, rail shipments to the Gulf Coast, which averaged 56,000 b/d last year, will grow by as much as 250,000 b/d this year and 600,000 b/d in 2018.
But rail or barge shipments can cost $12-20/bbl, compared with $5-13/bbl for pipeline transport.
Alternative markets
Between 2015 and 2035, Canadian demand for heavy crude and bitumen will increase by about 50% to more than 800,000 b/d, CERI predicts.
Some of the 3.9 million b/d remaining from output projected for 2035 might move to markets other than the US by pipelines planned but facing varying degrees of political resistance. They include:
• TransCanada's Energy East pipeline, scheduled for service by 2020 to carry 1.1 million b/d of crude from Alberta and Saskatchewan to marine terminals in Quebec and New Brunswick and to refineries in eastern Canada.
• Kinder Morgan's Trans-Mountain Expansion, which is to add 590,000 b/d of capacity between Alberta and the West Coast by 2019.
• Enbridge's Northern Gateway project, to be complete by 2020 to carry 525,000 b/d of heavy material from Alberta to the West Coast.
Despite delays and opposition, CERI expects these projects to begin operation within the next 5 years.
To account for project uncertainty, its study projects export rates to the US and US Gulf Coast according to varying assumptions about pipeline completion and utilization.
The high projection for exports to the US-3.9 million b/d by 2035-assumes completion of none of the three projects. The low projection-2.5 million b/d-assumes completion of all three pipelines and operation at 75% of capacity.
Between those rates, the study projects export rates to the US assuming completion only of Energy East and the Trans-Mountain Expansion, operated at 50% and 75% of capacity, and of all three projects, operated at 50% of capacity.
"It is clear that creation of pipeline infrastructure and shipping routes to international markets other than the US would favor market access of western Canadian heavy crude oil into the US Gulf Coast," the study says. "By allocating heavy production to other markets such as Asia and Europe, Canadian producers are able to reduce their overland dependence on the US market, reduce their supply to that market, and overcome pipeline constraint issues on the US Gulf Coast."
Netback analysis
CERI bases its netback analysis on an average 2015 price for Western Canadian Select crude oil at Hardisty, Alta., of $30.43/bbl (US).
The average 2015 price of medium-heavy sour crude typical of Mexican and Venezuelan grades landed at the US Gulf Coast was $45.95/bbl. From that, CERI subtracts a quality adjustment $2.50/bbl, mainly to account for the acidity that makes blended bitumen more difficult to refine than competitive Latin American crudes.
The resulting $13.02/bbl is the "gross possible price uplift Canadian producers could receive at the Gulf Coast," out of which transportation costs must be paid.
Transport options yielding positive netbacks to producers under these conditions, and their estimated costs, are pipeline with a 10-year committed toll, $8.79/bbl; pipeline and barge, $11.73/bbl; pipeline with uncommitted tolls, $12.03/bbl; and the Energy East pipeline and tanker, $12.50/bbl.
Yielding negative producer netbacks in this analysis are rail, with costs estimated at $15.50/bbl, and the Trans-Mountain Expansion and tanker, $15/bbl.