Western Canada Products Markets & Refining Background
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Western Canada Products Markets & Refining Background Prepared For: Imperial Oil Limited & Suncor Energy Products Partnership April 2014 Prepared by: Steven J. Kelly IHS Global Canada Limited Suite 200, 1331 Macleod Trail S.E. Calgary, AB T2G 0K3 CANADA IHS PROJECT NUMBER: 1011120 TERMS OF USE The accompanying materials were prepared by IHS. Content distributed or reprinted must display IHS’ legal notices and attributions of authorship. IHS provides the materials “as is” and does not guarantee or warrant the correctness, completeness or correctness, merchantability, or fitness for a particular purpose. All warranties of which are hereby expressly disclaimed and negated. To the extent permissible under the governing law, in no event will IHS be liable for any direct, indirect, special, incidental, lost profit, lost royalties, lost data, punitive, and/or consequential damages, even if advised of the possibility of same. ©2014 IHS. WESTERN CANADA PRODUCTS MARKET & REFINING BACKGROUND Table of Contents Introduction ............................................................................................................... 1 Summary of Conclusions ................................................................................................. 2 Western Canada Refined Petroleum Products Market Description .................................. 3 Prairies refined products markets are small and isolated ............................................. 3 The refined product supply/demand balance in Western Canada is tight ..................... 7 Prairies refined products market supply is mainly from the Prairies refineries .............10 Refined products supply on the Prairies depends upon pipeline logistics ....................14 Exchange agreements are used by fuel suppliers to address product imbalances ......15 Unplanned shutdowns have led to product shortages on the Prairies .........................16 Appendix A: Background and Overview of Refined Petroleum Products Markets ......19 Appendix B: Western Canada Downstream Petroleum Industry Description ..............21 Figures 1 Prairies Light Refined Product Domestic Sales ......................................................... 3 2 Light Refined Product Demand Comparison ............................................................. 5 3 Western Canada Gasoline Supply Balance ............................................................... 8 4 Western Canada Jet Fuel Supply Balance ................................................................ 8 5 Western Canada Diesel Supply Balance ................................................................... 8 6 Western Canada Net Products Trade ....................................................................... 9 7 Western Canada Refined Product Inventory Coverage ............................................10 8 Refinery Capacity by Province .................................................................................11 9 Prairies Refinery Production as Percentage of Demand ...........................................12 10 Refinery Utilization – Western Canada ....................................................................13 11 Regional Refinery Utilization Comparison ................................................................13 Tables 1 Road Transportation Distances in Western Canada .................................................. 6 2 Western Canada Refinery Shutdowns (Planned/Unplanned) ...................................17 3 Western Canada Refinery Capacity and Configuration ............................................22 4 Refined Product Pipeline Summary..........................................................................23 ©2014 i WESTERN CANADA PRODUCTS MARKETS & REFINING BACKGROUND 1 Introduction 2 On behalf of Imperial Oil Limited (“Imperial Oil”) and Suncor Energy Products Partnership 3 (“Suncor”), IHS was engaged to provide analysis related to Western Canada refined products 4 markets. The purpose of our analysis is to provide background for Imperial Oil and Suncor, relating 5 to an application by Trans Mountain Pipeline (“Trans Mountain”) before the National Energy Board 6 (“NEB”), referred to as “Trans Mountain Application for Tariff Amendments Regarding Verification 7 Procedures”. The application is proceeding number RHW-001-2013 before the NEB. 8 In this testimony, IHS will address the following matters related to Western Canada refined product 9 markets: 10 • Demand trends 11 • Market balancing mechanisms 12 • The role of pipelines, including Trans Mountain 13 • The impact of refinery shutdowns 14 In preparing its evidence, IHS relied on public information pertaining to refined products markets in 15 Canada and the United States. A number of sources were utilized, including regulatory filings, 16 public reports, corporate investor presentations, media reports and other documentation. Public 17 information from several statistical agencies was utilized. IHS’ proprietary models and databases 18 were applied to the preparation of this evidence. 19 The focus of this evidence is primarily on the historical period from 2008 to 2013. Where necessary 20 to illustrate points raised in the evidence, longer term historical information has been cited. The 21 geographical region of interest is Western Canada, comprised of the Prairie provinces (Manitoba, 22 Saskatchewan and Alberta), British Columbia, and the territories (Nunavut, Northwest Territories 23 and Yukon Territory). The evidence addresses the differences in refined products market supply for 24 the Prairie provinces and for British Columbia, and the role of Trans Mountain in managing supply. 25 ©2014 1 WESTERN CANADA PRODUCTS MARKETS & REFINING BACKGROUND 1 Summary of Conclusions 2 The IHS conclusions from this review of Western Canada refined products markets and the refining 3 industry are summarized below: 4 1. Prairies refined products markets are small and isolated from other North American 5 markets. Market demand trends for refined products in the Prairies exhibit seasonal 6 behaviour, and follow underlying economic activity. Distances between major demand 7 centres on the Prairies are long, as are the distances from the nearest potential sources of 8 product supply. In most cases, distances from supply sources are longer than the economic 9 limit of road transportation. 10 11 2. The supply/demand balance for refined products in Western Canada is tight. Refinery 12 rationalization and growing products demand have resulted in high average utilization of the 13 Prairies refineries, and a gradual reduction in inventory coverage ratios for gasoline and 14 diesel. Product markets typically balance to imports, the requirements for which vary 15 depending on seasonal demand trends and the operating status of the Prairies refineries. 16 17 3. Refined products supply on the Prairies is mainly sourced from Prairies refineries. 18 Given the long distances involved, external supply is a limited option on the Prairies. As a 19 result, balances for gasoline and diesel on the Prairies are met mainly by regional refinery 20 production. Surplus production is typically transferred to British Columbia, which is an 21 integral part of the refined products markets for the Edmonton refiners. This balance 22 mechanism between the Prairies and British Columbia can be accommodated because 23 product imports are available on the West Coast if needed. 24 25 4. Refined products supply on the Prairies depends upon pipeline logistics. Gasoline 26 and diesel produced in the Edmonton area is shipped to major terminals on the Prairies and 27 in British Columbia. Pipelines are the major mode of transportation for these deliveries. 28 Trans Mountain, which delivers product from Edmonton to British Columbia, is considered a 29 key component of the balancing mechanism for the Prairies refineries. 30 31 5. Product exchange agreements are used by fuel suppliers to address time and 32 location imbalances of products. Refineries on the Prairies rely on exchange agreements 33 to secure wholesale product for their market requirements, either in locations where they do 34 not have refining or terminal facilities, or at times when their own production is unavailable 35 due to a refinery shutdown. 36 37 6. Unplanned refinery shutdowns have led to product shortages on the Prairies. Several 38 incidents in recent years have demonstrated the sensitivity of the Prairies markets to 39 unplanned refinery shutdowns. If unplanned shutdowns occur at Prairies refineries, product 40 shortages on the Prairies may result. Alternative sources of supply in these situations may 41 be limited. ©2014 2 WESTERN CANADA PRODUCTS MARKETS & REFINING BACKGROUND 1 Western Canada Refined Petroleum Products Market Description 2 Prairies refined products markets are small and isolated 3 Demand for gasoline and diesel is increasing 4 Figure 1, Prairie Provinces Light Refined Product Domestic Sales, presents historical refined 5 product demand from 2008 to 2013, in thousand barrels per day (“B/D”).1 The major light refined 6 products are motor gasoline, diesel fuel oil and aviation turbine fuel (referred to throughout this 2 7 report as gasoline, diesel and jet fuel, respectively). FIGURE 1 PRAIRIES LIGHT REFINED PRODUCT DOMESTIC SALES (Thousand Barrels per Day) 300 50 Motor Gasoline Diesel Fuel Oil Aviation Turbine Fuel (Right Scale) 250 40 200 30 150 20 100 10 50 Source: Statistics Canada, statistical series 45-004 0 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 8 9 1 Prairies