The United States today is Canada’s largest customer for oil and refined oil products. However, this relationship may be strained due to physical, economic and political influences. Pipeline capacity is approaching its limits; Canadian oil is selling at substantive discounts to world market prices; and U.S. demand for crude oil and finished products (such as gasoline), has begun to flatten significantly relative to historical rates. Lower demand, combined with increased shale oil production, means U.S. demand for Canadian oil is expected to continue to decline. Under these circumstances, gaining access to new markets such as those in the Asia-Pacific region is becoming more and more important for the Canadian economy. However, expanding pipeline capacity to the Pacific via the proposed Northern Gateway pipeline and the planned Trans Mountain pipeline expansion is only feasible when there is sufficient demand and processing capacity to support Canadian crude blends. Canadian heavy oil requires more refining and produces less valuable end products than other lighter and sweeter blends. Canadian producers must compete with lighter, sweeter oils from the Middle East, and elsewhere, for a place in the Pacific Basin refineries built to handle heavy crude blends. Canadian oil sands producers are currently expanding production capacity. Once complete, the Northern Gateway pipeline and the Trans Mountain expansion are expected to deliver an additional 500,000 to 1.1 million barrels a day to tankers on the Pacific coast. Through this survey of the capacity of Pacific Basin refineries, including existing and proposed facilities, we have concluded that there is sufficient technical capacity in the Pacific Basin to refine the additional Canadian volume; however, there may be some modifications required to certain refineries to allow them to process Western Canadian crude. Any additional capacity for Canadian oil would require refinery modifications or additional refineries, both of which are not expected, given the volume of lighter and more valuable crude from the Middle East finding its way to Pacific Basin markets. Consequently, any new refinery capacity is not likely to be dedicated to Canadian crude shipments. This places increasing importance on the need to enter into long-term contracts to supply Pacific Basin refineries, backed up by evidence of adequate transportation capacity. Canadians will have to show first, and quickly, that we are committed to building pipelines that will bring sufficient volumes of oil to the Pacific coast necessary to give the refiners the certainty they need to invest in infrastructure for refining Canadian oil. Access to this crucial market will depend critically on the outcome of the pipeline approval process, and also the cost to ship from Canada. If Canada does not approve of the Pacific coast pipeline expansions, or takes too long in doing so, it could find its crude unable to effectively penetrate the world’s most promising oil export market
