OTTAWA – The domestic demand for oil just isn’t strong enough to justify building more refineries in Canada.
That’s the message federal politicians heard from both industry and government officials Tuesday as the parliamentary committee kicked off a study on the state of both oil and gas pipelines and refineries in Canada.
North American demand for petroleum is declining and is expected to remain flat driven by increasing fuel-efficiency standards, demographics and the development of alternative fuels, according to Peter Boag, president of the Canadian Petroleum Products Institute.
“It’s hard to justify spending $7 billion on a new refinery when there is already more than enough supply on the continent,” Boag told MPs.
Boag’s position was shared by Mark Corey, the Assistant Deputy Minister of Natural Resources Canada’s Energy Sector.
He said the fact Canadian refineries are operating under capacity makes it difficult to make the case to build new facilities.
The proposed Northern Gateway pipeline along with the Keystone XL pipeline, recently rejected by U.S. President Barrack Obama, has been fueling debate over where Canada should be sending its oil.
The pipeline projects would see Canadian crude be exported either to Asian markets including China, or to the United States where it would be refined.
Some people believe Canadian oil should remain within Canada’s borders for refining; a move they argue would create more sustainable jobs and energy security than building more pipelines.
Boag said he understands why people would make the argument, but the realities of the market get overlooked.
“The economic truths of supply and demand in the North American context often get lost or ignored in the debate,” he said.
Canada’s 19 refineries produce two million barrels of day, but they are only operating at 80 per cent capacity. The ideal, according to the industry, is to be operating at 95 per cent. Canadians consume about 1.8 million barrels of oil a day.
Refineries have already closed down in Canada, including Shell’s facility in Montreal.
About one-third of Canada’s crude oil production is refined in-country, and most of that is done in the west. Eastern refineries in Quebec and the Atlantic provinces refine primarily imported oil due to logistics and transportation costs, while Ontario’s refineries use a mix of both imported- and domestically-produced oil.
With costs of building a new refinery in excess of $7-billion and domestic demand peaking, Boag said it only makes sense to take advantage of crude oil export opportunities.
“As Canadians we export a lot of wheat, we don’t export baked goods. And certainly as coffee drinkers we import a lot of coffee beans, but we don’t import brewed coffee, so it’s consistent with a lot of commodities,” he said.
Corey confirmed that some of Canada’s crude will have to be exported, citing the size of Canada’s reserves which now sit at 174 billion barrels can could grow to 300 barrels.
“It is way bigger than anything Canadians could use over the next couple hundred years,” he said.
Costs are also added when trying to ship multiple refined oil products through one pipeline.
“Transporting finished products such as gasoline, diesel, aviation fuel over great distances, especially over great land distances, is expensive and logistically less efficient than transporting crude oil,” Boag said.
Corey said there is always the risk of cross-contamination as well as differing standards in the destination country.
Those considerations coupled with the economic benefits of using pre-existing, under-capacity refineries are driving the push for a pipeline. One example is the Keystone XL. It would connect Canada’s oil sands with refineries in the Gulf of Mexico, which have lost business from Central American oil countries, according to Corey.
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