In the News April 12

Extent of Integration of Canadian Energy Sector Within U.S. Economy

For Your Information

U.S. Refining Capacity Reaches 17 Million Barrels Per Day in 2019

Total refining capacity in the United States has increased from 15.3 million barrels per day of crude processed in 2000 to nearly 17 million barrels per day of crude processed in 2019, an increase of over 11 per cent. The increase has occurred despite the fact that no new U.S. refineries have been built. Instead, capacity has been added to existing U.S. refineries.

Broken down by Petroleum Administration for Defense District (PADD), refining capacity in PADD 1 has fallen from 1.5 million barrels per day in 2000 to 900,000 barrels per day in 2019, a decrease of over 39 per cent. Oil Sands Magazine (OSM) notes about PADD 1 that the U.S. East Coast is largely isolated from Canada’s pipeline supply, relying mostly on seaborne crude. Most of its imports from Canada are sourced from oil platforms located offshore Atlantic Canada. (Oil Sands Magazine, 2020)

PADD 2 refining capacity has increased from 3.4 million barrels per day in 2000 to 3.8 million barrels per day in 2019, an increase of 12 per cent. According to OSM, “the U.S. Midwest remains by far the largest customer for Western Canadian producers. The region is served by Enbridge’s Mainline pipeline, which is planned to be expanded to almost 3 million barrels per day. Midwest refineries blend mostly heavy crude from the oil sands, with light oil produced in North Dakota’s Bakken shale, which has also seen an increase in production.” (Oil Sands Magazine, 2020)

PADD 3 refining capacity has increased from 7.1 million barrels per day in 2000 to 9.1 million barrels per day in 2019, an increase of nearly 28 per cent. According to OSM, “with a large refining capacity and a dwindling supply of heavy oil, PADD 3 (Gulf Coast) is a leading customer for bitumen from the oil sands. The region’s refineries are best designed to handle heavy sour grades, offering the best purchase prices for the world’s heavy oil benchmarks. The region is currently served by TC Energy’s Keystone Pipeline, with additional volumes shipped via the Midwest, or transported directly by rail.” (Oil Sands Magazine, 2020)

PADD 4 refining capacity has increased from 513,000 barrels per day in 2000 to 630,000 barrels per day in 2019, an increase of nearly 23 per cent. According to OSM, “the Rocky Mountains region is located just south of Alberta and is the smallest of all five U.S. crude processing areas. PADD 4 relies heavily on heavy sour crude from the oil sands, blended with light Bakken crude produced domestically. Canada is the only foreign oil supplier into the Rocky Mountains, now making up about half of the region’s total refinery feedstock. The PADD 4 area is served by Enbridge’s Express Pipeline, which is planned to be expanded from the current 280,000 barrels per day to 330,000 barrels per day.” (Oil Sands Magazine, 2020)

PADD 5 refining capacity has fallen from 2.7 million barrels per day in 2000 to under 2.6 million barrels per day in 2019, a decrease of nearly six per cent. According to OSM, “Washington State refineries are currently served by the Trans Mountain Pipeline, while California refineries get Canadian crude by oil tanker, with additional volumes supplied by rail. California refineries are geographically cut-off from domestic supplies, relying mostly on overseas imports, blended with heavy oil volumes produced within the state. The region is likely to purchase more Canadian crude when the Trans Mountain Expansion is completed.” (Oil Sands Magazine, 2020)

Imports of Canadian Crude Oil to U.S. PADDs for Processing

Canadian crude oil imports to U.S. PADDs for processing have risen by over 2.5 million barrels per day, or 194 per cent in the past two decades.

Overall, Canadian crude oil imports to PADDs for processing have risen from over 1.3 million barrels per day in 2000 to over 3.8 million barrels per day in 2019, an increase of 183 per cent.

The breakdown of PADD oil imports from Canada is as follows:

– PADD 1: U.S. East Coast oil imports from Canada have risen from 185,000 barrels per day in 2000 to 221,000 barrels per day in 2019, an increase of over 19 per cent. Nearly 32 per cent of foreign oil imports into PADD 1 are now from Canada, up from 12 per cent in 2000.

– PADD 2: U.S. Midwest imports have risen from 915,000 barrels per day in 2000 to 2.5 million barrels per day in 2019, an increase of nearly 176 per cent. Nearly 100 per cent of foreign oil imports into PADD 2 are now from Canada, up from 60 per cent in 2000.

– PADD 3: U.S. Gulf Coast oil imports from Canada have risen from 16,000 barrels per day in 2000 to 516,000 barrels per day in 2019, an increase of 3,125 per cent. Over 26 per cent of foreign oil imports into PADD 3 are now from Canada, up from three per cent in 2000.

According to the U.S. Energy Information Administration (EIA), “Canada’s exports tend to be heavy crude oil, which Gulf Coast refiners are well equipped to process. Because most new U.S. crude oil production is light and sweet, many Gulf Coast refineries import heavier crude oils such as WCS (Canada’s primary export-grade crude oil) which is considered heavy and sour…. Due to the lack of progress on Keystone XL over the past decade, increasing volumes of Canadian crude oil have been transported to PADD 3 via rail (a more expensive option than via pipeline) because the existing pipelines have largely reached their capacities. This capacity limitation has created a transportation constraint and contributed to large price differentials between Western Canadian Select (WCS) and West Texas Intermediate (WTI) crude oil” (U.S. Energy Information Administration, 2019).

– PADD 4: U.S. Rocky Mountains oil imports from Canada have risen from 169,000 barrels per day in 2000 to 308,000 barrels per day in 2019, an increase of 82 per cent. One hundred per cent of foreign oil imports into PADD 4 are from Canada, unchanged from 2000.

– PADD 5: U.S. West Coast oil imports from Canada have risen from 63,000 barrels per day in 2000 to 246,000 barrels per day in 2019, an increase of over 290 per cent. Over 19 per cent of foreign oil imports into PADD 5 are now from Canada, up from nine per cent in 2000.

Every region in the United States is using more Canadian oil now than in 2000, even PADD 5, which has seen its overall processing capacity decline in that time.

Reliance of U.S. Refineries on Canadian Heavy Oil

The reliance of U.S. refineries on Canadian heavy oil includes oil from the oil sands: 56 per cent reliance on heavy oil by 2019, up from 25 per cent in 2000.

According to OSM, total U.S. crude output has risen significantly over the past two decades, mostly due to the rise of tight oil production from shale plays, beginning in 2008. Tight oil has a relatively high API density, making it much lighter than conventional oil.

The U.S. domestic supply of crude is becoming increasingly lighter, approaching 40 degrees on the API scale, creating a mismatch with the desired refinery feedstock density, which averages about 32 degrees.

Demand for heavier grades of crude has therefore increased, as refineries seek to blend light domestic crude with heavy and medium grade oil imports (Oil Sands Magazine, 2020).

Although the U.S. has been producing record levels of domestic crude oil, it nonetheless continues to import crude because of variations in crude oil quality. API gravity, along with sulfur content, determines the type of processing needed to refine crude oil into fuel and other petroleum products, all of which factor into refineries’ profits.

By adding imported heavy crude oil to domestic light crude oil in the production process, the U.S. has significantly increased its ability to export refined product. U.S. crude oil exports have increased since the restrictions on exporting domestically produced crude oil were lifted in December 2015.

The percentage of total imports of Canadian heavy oil to the U.S. (i.e. with an API Gravity of 25.0 degrees or less) has risen from 25.1 per cent in 2000 to 55.8 per cent in 2019, an increase of 122 per cent over the past two decades (see Figure 4). According to OSM, “PADD 3 U.S. Gulf Coast remains the prime customer for Canada’s heavy oil producers, including diluted bitumen from the oil sands. The region’s refineries are best designed to handle heavy sour grades, offering the best purchase prices for the world’s heavy oil benchmarks. Almost 100 per cent of Canadian crude oil exports into the U.S. Gulf Coast are heavy.” (Oil Sands Magazine, 2020)

Rise of Canadian Crude in U.S. Refinery Feedstock

Canadian crude in U.S. refinery feedstock has risen steadily over the past two decades from nearly nine per cent to over 21 per cent.

According to the EIA, U.S. refineries rely on imports as feedstock to optimize production and maximize profits. The refineries process heavy and medium crude oils efficiently and would likely be underutilized if a refinery chose to run only domestically produced light crude oil because the processing plants are designed to convert heavy, low-value intermediate crudes into high-value naphtha and distillates.

In addition to the differences in crude oil quality, the cost to the refiner of acquiring crude oil can be different for domestic and imported crude. The refiner acquisition cost is the total amount that a refiner can expect to pay for crude oil, including freight costs and other transportation fees. Traditionally, heavy and medium crude oils trade at a discount to light, sweet crude oils. Since 2012, the increase in the share of imported crude oils with lower API gravity (heavier oil) has resulted in a lower refiner acquisition cost for imported crude oil when compared with the domestically produced higher API gravity (lighter oil) volumes (U.S. Energy Information Administration, 2020).

The per cent of Canadian crude in U.S. refinery feedstock (i.e., the raw materials and intermediate materials processed at refineries to produce finished petroleum products, otherwise known as refinery inputs) has steadily risen from nearly nine per cent in 2000 to over 21 per cent by the end of 2019.

Canadian Crude as a Percentage of U.S. Feedstock, by PADD

Broken down by PADD region:

– PADD 1 refineries on the U.S. East Coast processed 24.6 per cent Canadian feedstock in 2019, up from 11.9 per cent in 2000;

– PADD 2 refineries in the U.S. Midwest processed 66.1 per cent Canadian feedstock in 2019, up from 26.8 per cent in 2000;

– Canada still represents only 5.7 per cent of PADD 3 U.S. Gulf Coast refinery feedstock, up from 0.2 per cent in 2000, and thus there are opportunities for Canada to supply more heavy crude to that PADD. According to OSM, “if the Keystone XL pipeline were completed, Canadian feedstock to PADD 3 could rise to as much as 15 per cent. PADD 3 could receive additional volumes of Canadian heavy crude by rail or by pipeline from PADD 2” (Oil Sands Magazine, 2020).

– PADD 4 refineries in the U.S. Rocky Mountains processed 48.9 per cent Canadian feedstock in 2019, up from 32.9 per cent in 2000. As OSM notes, “the PADD 4 area is served by Enbridge’s Express Pipeline, which is planned to be expanded from the current 280,000 barrels per day to 330,000 barrels per day. That should increase the amount of Canadian crude consumed in PADD 4” (Oil Sands Magazine, 2020).

– PADD 5 represents another prime point of entry for Canadian heavy crudes, particularly with the completion of TMX. As of 2019, about 9.6 per cent of PADD 5 refinery feedstock is Canadian, mostly processed in Washington State refineries, up from 2.3 per cent in 2000. According to OSM, “California refineries are geographically cut off from domestic supplies. They rely mostly on overseas imports, which they blend with heavy oil volumes produced within the state. The region is likely to purchase more Canadian crude when the TMX is completed” (Oil Sands Magazine, 2020).

According to the American Petroleum Institute and Wood MacKenzie, “America’s refiners are a strategic asset for the United States and maintaining a viable domestic refining industry is critical to the nation’s economic security. Domestic refineries are competing directly with petroleum product imports. Because the refining industry operates on a global basis, America faces the choice of either manufacturing these products at home or importing them from other countries. U.S. refinery closures would result in domestic job losses and lower government revenue in the form of taxes. It would also result in a greater reliance on foreign refineries, such as those being developed in the Middle East and India.” (American Petroleum Institute and Wood MacKenzie, 2011)

(Workers’ Forum, posted April 12, 2022)