Interplay of geography and demand underpins energy interdependency between the two countries, IHS Markit report says
11 August 2021, Canada: Canadian oil production is more than two and half times domestic demand, yet the majority of crude oil demand in the country arrives via the United States, according to a new analysis by IHS Markit (NYSE: INFO), a world leader in critical information, analytics and solutions.
The latest report by the IHS Markit Oil Sands Dialogue finds that approximately 55% of crude oil and condensate demand in Canada in 2019 was served either by imports from the United States (600,000 b/d) or were sourced from domestic production routed through the United States and then back into the country (480,000 b/d), known as reexports.
“The necessities of geography and the varying demands of markets for different types of crude underpin a highly complex and interdependent oil logistics system between Canada and the United States,” said Celina Hwang, director, North American crude oil markets, IHS Markit. “Although this study highlights Canadian dependence on the United States for both supply and transportation, the relationship is truly symbiotic with both nations relying on one another to meet domestic demand each day.”
A major factor in the workings of the system is that 95% of Canadian production occurs onshore, inland and often in areas far from its main consuming areas in the more populous central regions of Ontario and Quebec, the report says. The type of oil demanded in different regions also plays a role. Refineries in the U.S. Midwest and U.S. Gulf Coast invested in heavy processing units take advantage of growing western Canadian heavy oil production, while refineries in Ontario and Quebec remained geared toward lighter crude grades.
“Although not well-recognized, the U.S. Gulf Coast refinery complex is only slightly farther away from western Canadian production than Ontario and Quebec, and it’s significantly larger and already configured to consume significant volumes of heavy sour crude,” said Hwang. “That presents an attractive solution for both sides.”
IHS Markit estimates that, overall, Canada’s long-distance transportation system—which includes pipeline, rail and marine transport—handled about 6.6 MMb/d of crude oil in 2019, approximately 2 MMb/d more than the country produced.
The report says that the demands on that transportation system are also set to increase in coming years. The recently released IHS Markit 10-year production forecast estimates that, despite short- and medium-term impacts from COVID-19, Canadian crude supply is still expected to grow by nearly 900,000 b/d from 2020 to 2030.
“Most of the anticipated growth in Canadian production is set to come from the ramp-up and optimization of existing projects,” said Kevin Birn, vice president and chief Canadian oil market analyst, IHS Markit. “That growth is coming, and transportation capacity is needed to keep pace. IHS Markit estimates that, by just 2025, total crude movements could increase by more than 650,000 barrels per day from pre-pandemic levels.”
Pipeline capacity could see the greatest increase to keep up with the added supply, followed by an increase in marine tanker traffic. However, delays in new pipeline projects could result in greater movements of crude-by-rail than currently anticipated, the report says.
Additionally, potential disruption to existing pipelines—such as attempts to shut down the Enbridge Line 5 pipeline that serves Detroit and surrounding areas of Michigan and Ohio, as well as Toronto and surrounding areas in Ontario and Quebec—could have significant implications.
“Differing views on the pace of energy transition have put the energy interdependency between Canada and the United States under some strain,” Birn says. “Any disruption of existing infrastructure could have significant implications for Canada, the broader North American system and energy security.”