June. Crude Oil Forecast, Markets & Pipelines

Transcription

1 June Crude Oil 2011 Forecast, Markets & Pipelines Crude Oil Forecast, Markets & Pipelines 1

2 Disclaimer: This publication was prepared by the Canadian Association of Petroleum Producers (CAPP). While it is believed that the information contained herein is reliable under the conditions and subject to the limitations set out, CAPP does not guarantee the accuracy or completeness of the information. The use of this report or any information contained will be at the user s sole risk, regardless of any fault or negligence of CAPP. Material may be reproduced for public non-commercial use provided due diligence is exercised in ensuring accuracy of information reproduced; CAPP is identified as the source; and reproduction is not represented as an official version of the information reproduced nor as any affiliation. 2 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

3 EXECUTIVE SUMMARY CAPP annually releases its 15-year outlook for Canadian crude oil production to provide industry stakeholders, government agencies and other interested parties with an informed view of prospective changes in supply. This report integrates the forecast with an updated assessment of the potential market options and the corresponding pipeline infrastructure needed to reach these markets. While the forecast calls for more robust growth in Canadian crude oil production compared to the previous year, it remains less than forecast in This report also highlights the challenges that producers face in finding new markets for this growing production. Canadian Crude Oil Production and Supply Consistent with the 2010 report, CAPP has prepared both an expected forecast or Growth Case and an Operating & In Construction Case to provide a foundation to the expected case. CAPP s Growth Case for oil sands production is similar to the 2010 forecast for the first half of the outlook period. However, starting around 2018, this latest outlook is higher than the 2010 view. Of note, CAPP s recent forecast for conventional production shows a slight annual increase for the next several years in contrast to the steady annual decline shown in the previous outlooks. This can be attributed to the success of horizontal multi-fracturing technology over the last three years combined with the expectation of continued strong oil prices in the medium term which will continue to stimulate investment. Canadian Crude Oil Production million b/d Total Canadian (including oil sands) Oil Sands Oil Sands (Operating & In Construction only ) Overall, total Canadian oil production is expected to grow from 2.8 million b/d in 2010 to 4.7 million b/d in This is about 385,000 b/d higher than previously forecast, due primarily to the higher conventional production and the inclusion of some additional in situ projects that were previously put on hold. Canadian Oil Sands & Conventional Production thousand barrels per day 6,000 5,000 Actual Forecast Atlantic Canada 4,000 June 2010 Forecast Oil Sands Growth 3,000 2,000 Oil Sands Operating & In Construction 1, Pentanes Conventional Heavy Conventional Light Crude Oil Forecast, Markets & Pipelines i

4 Crude Oil Markets The U.S. Midwest is the primary export market for western Canadian crude oil supplies due to its strong demand, geographic proximity and established pipeline infrastructure. Several key factors suggest that growing supplies of crude oil from western Canada could find a market on the U.S. Gulf Coast or world markets once they reach Canada s west Coast, including California and Asia. With the recent startup of the Keystone Pipeline to Patoka, Illinois, followed by the extension of this pipeline into Cushing, Oklahoma, crude oil supplies from western Canada into the U.S. Midwest market are expected to grow. In the meantime, western Canadian crude oil producers have growing supplies and are looking at accessing new markets for this supply. Producers currently have limited transportation options to serve alternative markets on the U.S. Gulf Coast. This is the largest refining market in the world and over half of the existing capacity can process heavy crude oil. Refineries in this market are looking to replace declining supplies historically coming from Mexico and Venezuela. Imports of crude oil in U.S. western states, specifically California and Washington, could increase since the refineries in this market get the majority of their crude oil supplies from California and Alaska and production from these states has been steadily declining. The Asian market is expected to grow substantially and access to these markets is an important part of achieving market diversity. The International Energy Agency estimates China s demand for oil will grow by 10 per cent in 2011, and high rates of growth are anticipated to continue. This, along with growth in other parts of Asia and India, will increase world crude oil demand, which in a global context, will enhance the global importance of Canadian supplies. Market Demand for Western Canadian Crude Oil Actual 2010 and 2015 Additional thousand barrels per day 632 Supply 552 [+82] , ,549 Non-US 25 [unknown] 393 PADD V PADD IV 613 PADD II 3, [+11] 2, [+64] 237 [+8] 1,231 [+483] 1, [+10] 2011 Total Refining Capacity PADD I 8,996 PADD III 119 [+380] 2010 Actual Demand 2015 Potential Additional Demand ii CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

5 Crude Oil Pipelines and Expansions The Keystone Base Pipeline and the Cushing Extension provided 591,000 b/d of new pipeline capacity that connects western Canadian supplies to market hubs in Illinois and Oklahoma. These pipelines provide ample capacity to traditional U.S. Midwest markets. With the forecast of growing supplies, the industry is: strategically looking to expand access to markets; focused on addressing the need for more capacity into the U.S. Gulf Coast; and increasing pipeline capacity to the west coast. A number of pipeline projects are being proposed to provide both market access and additional capacity that will be needed by Canadian producers in the future. There are a number of new pipeline proposals from Cushing to the U.S. Gulf Coast being proposed that would provide an outlet for the current oversupply of Canadian and U.S. crude that has been building in the U.S. Midwest. There are also pipeline proposals to expand export capacity to the west coast, providing access to new markets with strong growth potential. Canadian & U.S. Crude Oil Pipelines - All Proposals Kitimat Kinder Morgan TMX Northern Leg Burnaby Trans Mountain Enbridge Gateway Edmonton Hardisty Kinder Morgan TMX2 Expansion TMX3 Expansion Anacortes Enbridge Alberta Clipper Enbridge (North Dakota) Expansion Salt Lake City Express TransCanada Keystone XL Platte TransCanada Keystone & Cushing Extension Centurion Pipeline Guernsey Spearhead South 1 - Enterprise/ETP Cushing-Gulf 2 - Enbridge Monarch 3 - Keystone Cushing MarketLink Houston Clearbrook St. Paul Cushing Superior BP Enbridge Capline Mid Valley Sarnia Montréal Flanagan Chicago TransCanada Keystone East Lima Wood Spearhead North Patoka River Mustang Port Arthur Enbridge Line 9 Reversal ExxonMobil Pegasus Portland Canadian and U.S. Oil Pipelines Enbridge Pipelines, Alberta Clipper and connections to the U.S. Midwest Kinder Morgan Express Kinder Morgan Trans Mountain TransCanada Keystone Proposed pipelines to the West Coast Existing / Proposed pipelines to PADD III Expansion to existing pipeline Crude Oil Forecast, Markets & Pipelines iii

6 TABLE OF CONTENTS EXECUTIVE SUMMARY LIST OF FIGURES AND TABLES i v 1 INTRODUCTION 1 2 CRUDE OIL PRODUCTION AND SUPPLY FORECAST Canadian Crude Oil Production Western Canadian Crude Oil Production Conventional Crude Oil Production Oil Sands Western Canadian Crude Oil Supply Methodology Crude Oil Production and Supply Summary 8 3 CRUDE OIL MARKETS Canada Western Canada Ontario Québec United States PADD I (East Coast) PADD II (Midwest) PADD III (Gulf Coast) PADD IV (Rockies) PADD V (West Coast) Asia Methodology Markets Summary 17 4 CRUDE OIL PIPELINES Existing Major Oil Pipelines Exiting Western Canada Oil Pipelines to the U.S. Midwest Oil Pipelines to the U.S. Gulf Coast Oil Pipelines to the West Coast Other Pipelines Diluent Pipelines Pipeline Summary 24 GLOSSARY 25 APPENDIX A: Acronyms, Abbreviations, Units and Conversion Factors 27 APPENDIX B: CAPP Canadian Crude Oil Production and Supply Forecast APPENDIX C: Crude Oil Pipelines and Refineries 31 iv CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

7 LIST OF FIGURES AND TABLES Figures Figure 2.1 Canadian Oil Sands & Conventional Production 3 Figure 2.2 Growth Case - Western Canada Oil Sands & Conventional Production 4 Figure 2.3 Oil Sands Regions 4 Figure 2.4 Operating & In Construction - Western Canada Oil Sands & Conventional Production 5 Figure 2.5 Growth Case - Western Canada Oil Sands & Conventional Supply 7 Figure 2.6 Operating & In Construction - Western Canada Oil Sands & Conventional Supply 8 Figure 3.1 Market Demand for Western Canadian Crude Oil Actual 2010 and 2015 Additional 9 Figure 3.2 Western Canada: Forecast Western Canadian Crude Oil Receipts 10 Figure 3.3 Ontario: Forecast Western Canadian Crude Oil Receipts 10 Figure 3.4 Petroleum Administration for Defense Districts 11 Figure PADD I: Foreign Sourced Supply by Type and Domestic Crude Oil 11 Figure PADD II: Foreign Sourced Supply by Type and Domestic Crude Oil 12 Figure 3.7 PADD II (North): Forecast Western Canadian Crude Oil Receipts 12 Figure 3.8 PADD II (East): Forecast Western Canadian Crude Oil Receipts 13 Figure 3.9 PADD II (South): Forecast Western Canadian Crude Oil Receipts 13 Figure PADD III: Foreign Sourced Supply by Type and Domestic Crude Oil 14 Figure 3.11 PADD IV: Forecast Western Canadian Crude Oil Receipts 15 Figure PADD V: Foreign Sourced Supply by Type and Domestic Crude Oil 15 Figure 3.13 Washington: Forecast Western Canadian Crude Oil Receipts 16 Figure PADD V (California): Foreign Sourced Supply by Type and Domestic Crude Oil 16 Figure 4.1 Canadian & U.S. Crude Oil Pipelines - All Proposals 18 Tables Table 2.1 Canadian Crude Oil Production 2 Table 2.2 Western Canadian Crude Oil Production 3 Table 2.3 Western Canadian Crude Oil Supply 6 Table 3.1 Summary of Major Announced Refinery Upgrades in Eastern PADD II 13 Table 3.2 Summary of Major Announced Refinery Upgrades in PADD III 15 Table 3.3 Total Oil Demand in Major Asian Countries 17 Table 4.1 Capacity of Major Crude Oil Pipelines Exiting the WCSB 19 Table 4.2 Summary of Oil Pipelines to the U.S. Midwest 21 Table 4.3 Summary of Oil Pipelines to the U.S. Gulf Coast 22 Table 4.4 Summary of Oil Pipelines to the West Coast 23 Table 4.5 Summary of Diluent Pipelines 24 Crude Oil Forecast, Markets & Pipelines v

8 1 INTRODUCTION CAPP annually releases its 15-year outlook for Canadian crude oil production to provide industry stakeholders, government agencies and other interested parties with an informed view of prospective changes in supply. Although the primary focus for the report is to provide such a forecast, the report also includes a discussion of the market outlook for Canadian crude oil. In addition, an overview is provided of the pipelines that currently transport Canadian crude oil supplies as well as new pipeline projects that could be constructed in order to provide the industry with transportation to alternative markets. This annual update also discusses emerging developments and their potential impacts on the industry. The upstream Canadian oil industry continues to face many risks and challenges but there were some positive developments for the industry in 2010 as compared to the previous year. In 2010, WTI crude oil prices averaged around US$80 per barrel and exhibited less volatility than was seen in This more stable pricing environment created a better investment climate for the industry. Also, production in both the Atlantic and conventional wells in Western Canada performed better in 2010 than forecast in last year s report. While there were operational challenges for a number of the mining projects, this production loss was offset somewhat by higher growth in production from the in situ projects. With WTI oil prices in the first half of 2011 surpassing the US$100 per barrel level and growing success in the industry from applying advanced oil recovery techniques, this latest forecast has an improved outlook for conventional production with respect to previous years. The first half of the forecast is similar to last year s forecast but from 2019 to 2025, the forecast is now higher. This is the result of a more accelerated startup of production phases and the revival of certain development projects that had previously been put on hold. CAPP s estimate of industry capital spending for oil sands development is $16 billion for 2011 compared to $13 billion spent in The U.S., particularly the U.S. Midwest, continues to be the largest market for western Canadian crude oil. However, industry players need to continue working to establish market diversity. Industry efforts are currently concentrated towards ensuring that the potential demand from the U.S. Gulf Coast can be accessed. In addition, strong interest remains to supply at least some of the anticipated growing demand from the Asia Pacific region. The report consists of 4 main chapters as follows: Chapter 1 is the introduction to the report. Chapter 2 provides the crude oil production and supply forecast. Chapter 3 identifies the existing and potential crude oil markets. Chapter 4 describes the existing crude oil pipeline network and the proposed projects designed to enable Canadian supplies to expand the reach into key markets. 1 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

9 2 CRUDE OIL PRODUCTION AND SUPPLY FORECAST Canada has proven oil reserves of over 175 billion barrels, which are the third largest in the world. According to the Oil and Gas Journal, Canada also ranks as the world s sixth largest oil producing country. Future growth in oil production is expected to be primarily sourced from the oil sands areas. However, the nearterm outlook for conventional production from Saskatchewan and Alberta has also improved with the greater use of new technologies being anticipated. In early 2011, CAPP surveyed all oil sands producers on their anticipated production over the next 15 years in order to form the basis of this latest update of CAPP s long-term crude oil forecast. This data, by project, was subsequently risked through adjustments to projected start dates and production profiles to produce an expected outlook in consideration of historical production capacity. CAPP s forecast of conventional production was developed from information provided by various provincial government departments and agencies that was incorporated with internal staff analysis. 2.1 Canadian Crude Oil Production Although most of Canada s crude oil production comes from western Canada, 11 per cent is produced from Atlantic Canada. In 2010, Canada s production was comprised of almost 2.6 million b/d sourced from western Canada and 276,000 b/d sourced from Atlantic Canada. Atlantic Canada s oil industry is located offshore from the province of Newfoundland, and consists of three independent oil developments - Hibernia, Terra Nova and White Rose. Production from Atlantic Canada increased three per cent in the first time a year-over-year increase has been recorded since Production in 2010 was higher than originally forecast due mainly to decreased downtime compared to 2009, better-than-expected recovery from several wells at Hibernia, and the startup of the North Amethyst field. The North Amethyst field is the first satellite field development at White Rose. Overall, future declines in production from existing fields will be partially offset with new production from newly connected satellite fields and the start up of the Hibernia South Extension. The Hebron heavy oil project is also expected to begin production before the end of Most of this oil is around 20 API gravity. The forecast continues to show significant production growth in western Canada, particularly the oil sands, as discussed in more detail in the following sections. Consistent with CAPP s 2010 report, this year s Growth Case is the expected production outlook. The secondary case includes only projects that are either currently operating or are in construction. (Figure 2.1). Table 2.1 shows that in the Growth Case, total Canadian production is expected to reach 4.7 million b/d in Under the Operating & In Construction Case, production increases but then declines in the latter part of the forecast to 3.3 million b/d by 2025 due to the natural declines in production from both mature conventional fields and Atlantic Canada. Table 2.1 Canadian Crude Oil Production million b/d Growth Operating & In Construction Crude Oil Forecast, Markets & Pipelines 2

10 Figure 2.1 Canadian Oil Sands & Conventional Production thousand barrels per day 6,000 5,000 Actual Forecast Atlantic Canada 4,000 June 2010 Forecast Oil Sands Growth 3,000 2,000 Oil Sands Operating & In Construction 1, Pentanes Western Canadian Crude Oil Production The Western Canadian Sedimentary Basin (WCSB), which underlies most of Alberta, parts of Saskatchewan, British Columbia, Manitoba and the Northwest Territories, contains the world s third largest reserves of oil. Oil production from western Canada can be further differentiated by production coming from conventional drilling or from oil sands production, which consists of both mining and in situ projects. In 2010, 2.6 million b/d of oil was produced, comprised of about 42 per cent from conventional oil fields and 58 per cent from oil sands. Table 2.2 shows the forecast for total western Canadian crude oil production. Compared to CAPP s 2010 forecast, conventional production is higher. In fact, the natural decline in production that has been exhibited for over 10 years is expected to be reversed in the near term. Higher production from oil sands projects in the latter part of the forecast is also now expected due to greater certainty surrounding the development of a number of in situ projects (Figure 2.2). The production forecast in the Operating & In Construction Case is slightly higher than in the previous forecast due to higher conventional production and the inclusion of additional projects that have moved into the construction phase. (Figure 2.4) Conventional Heavy Conventional Light 2021 Table 2.2 Western Canadian Crude Oil Production million b/d Conventional 2023 (including condensate) Oil Sands Growth Case Operating & In Construction Conventional Crude Oil Production From an oil exploration and development standpoint, conventional oil fields in the WCSB are relatively mature. However, future technology improvements could increase the rate of recovery for the oil-in-place, which is currently only around 26 per cent. In fact, the use of horizontal wells and multi-stage fracturing techniques in conventional wells has yielded better than expected results in recent years, suggesting that we may have previously underestimated the impact. In 2010, the decline in conventional crude oil production was effectively halted for the first time in over 10 years, which can be attributed to the increased use of this technology that was encouraged by a higher price environment and favourable royalty changes in the province of Alberta. 3 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

11 Figure 2.2 Growth Case - Western Canada Oil Sands & Conventional Production thousand barrels per day 6,000 5,000 Actual Forecast 4,000 3,000 June 2010 Forecast In Situ 2,000 Mining 1, Pentanes Conventional Heavy Conventional Light Although the WCSB spans several provinces, most of the oil resources are located in the provinces of Alberta and Saskatchewan. The successful use of horizontal drilling and multi-fracturing in the Bakken formation in Saskatchewan provided the earliest indications that this technology was a game changer for the industry. Over the medium term, moderate growth in Saskatchewan light oil production is estimated. The Bakken play is expected to continue to perform strongly; and there is increased interest in horizontal drilling in emerging oil plays like the Lower Shaunavon in the southwest of the province, the Viking in west-central Saskatchewan around Kindersley and the Birdbear in the northwest of the province near Lloydminster. Similarly, the Cardium formation in Alberta and the Viking formation in central and eastern Alberta and west central Saskatchewan have been identified as formations well suited for increased use of this technology since they contain large deposits of oil-in-place with historically low recovery rates. Industry continues to focus on acquiring oil well licenses as a result of strong oil prices. Oil well permitting licenses are up significantly in Alberta, Manitoba and Saskatchewan at decade high rates across western Canada Oil Sands Production from oil sands currently comprises 58 per cent of western Canada s total crude oil production. In the Growth Case, production is expected to grow from 1.5 million b/d in 2010 to 2.2 million in 2015 and to 3.7 million b/d in The increase in the latter part of the forecast results from a combination of the acceleration of the startup of certain project phases and production from projects that were previously placed on hold. Figure 2.3 Oil Sands Regions Peace River Peace River Deposit Athabasca Deposit Edmonton Fort McMurray Lloydminster Area of Potential Cold Lake Deposit Calgary Crude Oil Forecast, Markets & Pipelines 4

12 Canada s oil sands deposits are divided into three major regions in northern Alberta referred to as the Athabasca, Cold Lake and Peace River deposits (Figure 2.3). The Alberta Energy Resources and Conservation Board (ERCB) estimated at year-end 2009, that these areas contain remaining established reserves of 170 billion barrels. Of the remaining established reserves in Alberta, 136 billion barrels, or 80 per cent, is considered recoverable by in situ methods and 34 billion barrels can be recovered by surface mining. In situ recovery includes both primary methods, which are similar to conventional production, and other methods whereby steam, water, or other solvents are injected into the reservoir to reduce the viscosity of the bitumen, allowing it to flow to a vertical or horizontal wellbore. There are also smaller deposits in northwest Saskatchewan next to the Athabasca oil sands deposit. The Saskatchewan Ministry of Energy and Resources has estimated 2.7 million hectares of potential land but the resource base has not been officially determined. from the Imperial Kearl Lake mining project, which is slated to come online in 2012, will likely come on to the market as a diluted bitumen as it does not have an affiliated upgrader. Also, a recent update on the future expansion at Syncrude notes that bitumen production will exceed the upgrader s processing capacity. However, in early 2011, Northwest Upgrading and Canadian Natural Resources Ltd (CNRL) signed an agreement to build, manage and operate a new bitumen refinery near Redwater, Alberta. This facility would be able to upgrade some of the growing volumes of diluted bitumen available from both in situ and mining projects. Recovery of raw bitumen using in situ methods is set to surpass production from mining methods by Currently, of the in situ projects in operation, only the Long Lake project operated by Nexen Inc. is coupled with upgrading facilities. Also, production from the Suncor Firebag and MacKay River projects are upgraded at Suncor s facilities. Otherwise, the majority of in situ bitumen production is not upgraded prior to reaching markets. In 2010, 53 per cent of the total bitumen produced from oil sands deposits was mined. Currently, all mined bitumen is transformed into upgraded light crude oil as part of an overall integrated operation. However, bitumen production Figure 2.4 Operating & In Construction - Western Canada Oil Sands & Conventional Production thousand barrels per day 6,000 5,000 Actual Forecast 4,000 3,000 2,000 June 2010 Forecast In Situ In Situ Mining 1, Pentanes Conventional Heavy Conventional Light CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

13 The integrated mining and upgrading projects in operation are listed below: The Suncor Steepbank and Millennium Mine; The Syncrude Mildred Lake and Aurora Mine; The Athabasca Oil Sands Project (AOSP); and The CNRL Horizon Project. In September 2010, Shell s Jackpine mine started production and an accompanying expansion of upgrading capacity is expected sometime in Imperial s Kearl Lake Project and expansions by both Syncrude and CNRL s Horizon are the major mining projects currently under construction. In the Operating & In Construction Case, oil sands production is expected to grow from over 1.5 million b/d in 2010 to approximately 2.2 million b/d around the end of the forecast period. (Figure 2.4). Please refer to Appendices B.1 and B.2 for detailed production data tables. 2.3 Western Canadian Crude Oil Supply In order to be transported by pipeline and because refineries are configured to process particular types of crude oil, the production discussed in the previous section is transformed into a variety of crude oil types. It is these volumes that comprise the crude oil supply, or volumes available to markets. The CAPP forecast categorizes the various crude oil types that comprise western Canadian crude oil supply into four major categories: Conventional Light, Conventional Heavy, Upgraded Light and Oil Sands Heavy. Oil Sands Heavy includes upgraded heavy sour crude oil, bitumen diluted with upgraded light crude oil (also known as SynBit ) and bitumen diluted with condensate (also known as DilBit ). An example of such a DilBit would be Cold Lake crude, which has a density of about 930 kg/m 3 (21 API) and a sulphur content of 3.6 per cent. Blending for DilBit requires a 70:30 bitumen to condensate ratio while blending for SynBit changes the blending ratio to approximately 50:50. Bitumen is so viscous that it needs to be diluted with a lighter hydrocarbon, to create a type of crude oil that meets pipeline specifications for density and viscosity. Although the main source of diluent is condensate that is recovered from processing natural gas in western Canada, the needs of growing bitumen production exceed this diluent supply. In 2010, an average of over 116,000 b/d of combined butane, diluents from upgraders, and imported condensates supplemented the locally produced condensate supply. This latest forecast is not constrained by the availability of condensate imports as new sources of condensate are assumed to be available to meet market requirements. For example, higher volumes of imports are expected going forward given that Enbridge s Southern Lights Pipeline started up in Some producers have indicated their intention to use upgraded light crude oil to blend with their bitumen production instead of condensate. This latest forecast reflects a similar use of upgraded synthetic crude oil as a source of diluent as the 2010 forecast. Overall, decreases in the reported yield losses for some projects, higher production and the required accompanying increase in condensate imports results in a higher supply forecast than in Table 2.3 Western Canadian Crude Oil Supply million b/d Growth Operating & In Construction Table 2.3 shows the projections for total western Canadian crude oil supply. Please refer to Appendices B.3 and B.4 for detailed data. In the Growth Case, light crude oil supply is projected to grow from about 1.2 million b/d in 2010 to 1.5 million b/d in 2015 and eventually decline slightly by Heavy crude oil supply is projected to grow from 1.5 million b/d in 2010 to 2.0 million b/d in 2015 and to 3.8 million b/d in Crude Oil Forecast, Markets & Pipelines 6

14 Figure 2.5 Growth Case - Western Canada Oil Sands & Conventional Supply thousand barrels per day 000 6,000 Actual Forecast 000 5,000 June 2010 Forecast 000 4, ,000 Oil Sands Heavy* 000 2, , Upgraded Light Conventional Heavy Conventional Light * Oil Sands Heavy includes some volumes of upgraded heavy sour crude oil and bitumen blended with diluent or ugpraded crude oil. Note that the Upgraded Light crude oil supply includes the light crude oil volumes produced from: Upgraders that process conventional heavy oil, e.g., the Husky Upgrader at Lloydminster and the CCRL Upgrader in Regina; Integrated mining and upgrading projects, e.g., Suncor, Syncrude and CNRL operations; Integrated in situ projects, e.g., the Nexen Long Lake project; Offsite upgraders, e.g., the Athabasca Oil Sands Project; and the Northwest Upgrader. Compared to the 2010 forecast, the Upgraded Light crude oil supply has been revised slightly downward. This reflects the recent announcement that Suncor and Total are cooperatively planing to build one shared upgrader for production from two mining projects, instead of separate upgraders. The Oil Sands Heavy category, is forecast to increase from 1.2 million b/d in 2010 to 1.7 million b/d in 2015 and up to 3.6 million b/d in (Figure 2.5). In the Operating & In Construction Case, with the increased conventional production forecast, the overall decline in production has been pushed back until (Figure 2.6). The supply of Upgraded Light crude oil is forecast to grow from 660,000 b/d in 2010 to 927,000 b/d in 2015 and remain flat thereafter. Oil Sands Heavy is forecast to grow from 1.1 million b/d in 2010 to 1.7 million b/d in 2015 and increases to an average of 1.8 million b/d for the remainder of the forecast period. 2.4 Methodology CAPP did not survey conventional crude oil producers but instead used our internal analysis that incorporated historical trends, recent announcements and discussions with provincial government representatives to derive the forecast. From the results of the survey of oil sands producers, CAPP determined the amount of upgraded crude oil and bitumen that could potentially be available to the market. 7 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

15 Figure 2.6 Operating & In Construction - Western Canada Oil Sands & Conventional Supply thousand barrels per day 00 6, ,000 Actual Forecast 00 4, , ,000 June 2010 Forecast Oil Sands Heavy* 00 1, Upgraded Light Conventional Heavy Conventional Light * Oil Sands Heavy includes some volumes of upgraded heavy sour crude oil and bitumen blended with diluent or ugpraded crude oil. The following key assumptions have been used to determine available oil sands supply: a) All bitumen must be blended with either condensate or upgraded light crude oil to meet pipeline specifications; b) Condensate is the preferred diluent over upgraded light crude oil; c) The Southern Lights Pipeline can deliver additional diluent to western Canadian producers; d) Railed imports could supplement a shortfall of condensate that could be required by producers beyond the capacity provided by Southern Lights and before an expansion of the pipeline or other alternative is in place. 2.5 Crude Oil Production and Supply Summary Conventional production is significantly higher in this latest forecast compared to the 2010 outlook. This is primarily due to the expectation for continued strong oil prices encouraging drilling and the use of horizontal drilling techniques which has been increasing the productive capacity of individual wells. A slight growth is forecast for the next several years compared to earlier forecasts calling for a steady decline in 2010 and beyond. On the oil sands side, the forecast reflects an improved performance trend for in situ projects and the inclusion of some additional projects that were previously put on hold. Most of the growth in oil sands production will be blended with a diluent and transported to a market capable of processing heavier crude oil types. Production from Atlantic Canada is expected to increase in 2017 once the Hebron Project is online. Crude Oil Forecast, Markets & Pipelines 8

16 3 CRUDE OIL MARKETS Canada produces more crude oil than it can consume domestically. This section provides an assessment of the crude oil markets that are accessible to exports from Canada. The potential for further market penetration into existing markets in the U.S. is examined as well as the prospects for expanding into new markets. Each year, CAPP surveys refineries in Canada and the U.S. to determine their current capability and future plans to process additional supplies from Canada (Figure 3.1). In 2010, available crude oil supply from western Canada was 2.7 million b/d. Domestic demand for western Canadian crude oil was 828,000 b/d and the remaining supply of over 1.9 million b/d or 69 per cent was exported (Figure 3.1). Eastern PADD II (particularly, Illinois, Indiana, Michigan, Ohio and Minnesota) is the largest market for western Canadian crude oil. The other primary markets are currently: British Columbia; Alberta; Saskatchewan; Ontario; PADD IV; California and Washington in PADD V. Figure 3.1 Market Demand for Western Canadian Crude Oil Actual 2010 and 2015 Additional thousand barrels per day 632 Supply 552 [+82] , ,549 Non-US 25 [unknown] 393 PADD V PADD IV 613 PADD II 3, [+11] 2, [+64] 237 [+8] 1,231 [+483] 1, [+10] 2011 Total Refining Capacity 8,996 PADD I PADD III 119 [+380] 2010 Actual Demand 2015 Potential Additional Demand 9 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

17 3.1 Canada Canadian refineries that have access to western Canadian crude oil have a total refining capacity of over one million b/d. In 2010, these refineries processed about 828,300 b/d of western Canadian crude oil. This is expected to increase to approximately 921,900 b/d by 2015 with planned refinery expansions Western Canada There are eight refineries located in western Canada with a total refining capacity of about 632,000 b/d. These refineries process western Canadian crude oil exclusively. In 2010, they received 551,800 b/d of crude oil and this is expected to increase to 634,400 b/d in 2015 (Figure 3.2). The Moose Jaw asphalt plant in Moose Jaw, Saskatchewan produces mostly asphalt while other refineries manufacture a wide range of petroleum products. Figure 3.2 Western Canada: Forecast Western Canadian Crude Oil Receipts Total refining capacity = Light Synthetic Conventional Light Sweet Conventional Medium Sour Heavy Source: 2011 CAPP Refinery Survey 2013 thousand barrels per day Minor refinery operational and supply issues lowered the amount of crude processed at Suncor s refinery in Edmonton in This refinery is configured to process oil sands feed stock. Future additional western Canadian crude oil receipts is related to expansion plans for the Consumers Co-operatives refinery, located in Regina, by the end of 2012 and the start up of CNRL s Northwest Upgrader Ontario There are four refineries (excluding the Nova Chemical refinery and petrochemical complex in Sarnia) located in Ontario with a total refining capacity of 393,000 b/d. These refineries process western Canadian crude oil as well as foreign imported crude oil and Atlantic Canada production. The supplies from the latter two sources arrive by tankers and are then moved through the Portland-to-Montréal Pipeline and, subsequently transported on the Enbridge Montréal-to-Sarnia Pipeline (Line 9). Note that Ontario refineries have, for a number of years, selected their feedstock sources based on both availability and pricing. According to Statistics Canada, Ontario refineries received 362,700 b/d of crude oil in 2010 from the following sources: Western Canada (276,500 b/d or 76 per cent); Eastern Canada (11,800 b/d or 3 per cent); United Kingdom (23,700 b/d or 6 per cent); United States (10,900 b/d or 3 per cent); and other foreign sources (39,600 b/d or 11 per cent). Receipts of western Canadian crude oil are projected to increase slightly during the forecast period assuming that Enbridge s current Line 9 reversal proposal proceeds. (Figure 3.3). Figure 3.3 Ontario: Forecast Western Canadian Crude Oil Receipts Total refining capacity = Québec 2012 Light Synthetic Conventional Light Sweet Conventional Medium Sour Heavy Source: 2011 CAPP Refinery Survey 2013 thousand barrels per day Québec has two refineries with a combined capacity of 395,000 b/d. Suncor s refinery in Montréal has a capacity of 130,000 b/d and Ultramar s refinery in Québec City has a capacity of 265,000 b/d. The Montréal refinery can process crude from both Atlantic Canada and foreign sources received from the Portland-to-Montréal pipeline. If market Crude Oil Forecast, Markets & Pipelines 10

18 conditions permit, the reversal and use of Line 9 would also enable this refinery to access western Canadian crude oil supplies. Suncor has estimated that its refinery could process between 20,000 b/d to 60,000 b/d of oil sands feedstock. 3.2 United States Based on a total refining capacity of almost 18 million b/d, the United States is the world s largest oil market. In 2010, Canada was by far the largest exporter of crude oil to the U.S., exporting almost double the volumes of each of the next three largest exporting countries Mexico, Venezuela and Saudi Arabia. Canada exported almost 2.0 million b/d, which was equivalent to around 21 per cent of total U.S. imports from foreign sources. Of this volume, 1.8 million b/d was sourced from western Canada (Figure 3.1). The U.S. demand for western Canadian oil supply is expected to reach 2.7 million b/d in Although overall U.S. crude oil demand is not expected to increase significantly, western Canadian crude oil should supply a growing share of this market if the necessary pipeline infrastructure is put in place to enable greater access to major U.S. markets. Declines in imports from other major suppliers to the U.S. is expected in the near term due to a combination of falling production, increased domestic consumption, or a focus on expansion into new export markets such as Asia. Figure 3.4 Petroleum Administration for Defense Districts The U.S. Department of Energy divides the 50 states in the U.S. into five Petroleum Administration for Defense Districts or PADDs (Figure 3.4). The PADDs were originally delineated during World War II for oil allocation purposes and remain the convention for describing U.S. oil market regions PADD I (East Coast) PADD I is located along the east coast of the United States. There are 10 refineries in Georgia, New Jersey, Pennsylvania, and West Virginia with a total refining capacity of 1.2 million b/d. Refineries on the east coast are more vulnerable to closures due to age, location and easy access to refined petroleum products from refineries in Europe and the Middle East. Of note, Sunoco shut down its Eagle Point refinery in New Jersey in February 2010 while Western Refining closed the only refinery that was located in Virginia in September This largely accounted for the slightly lower overall volumes of crude oil processed in PADD I in 2010 compared to Figure PADD I: Foreign Sourced Supply by Type and Domestic Crude Oil Total refining capacity = 1,312 Domestic crude Heavy thousand barrels per day PADD V: West Coast, AK, HI AK CA HI OR WA NV AZ ID UT PADD IV: Rockies MT WY NM CO TX ND SD NE KS OK MN AR IA MO WI PADD II: Midwest IL MS AL LA MI IN OH TN KY SC GA PA WV VA FL NC NY VT ME NH MA RI CT NJ DE MD PADD I: East Coast 776 Light Sweet* * Includes small volumes of Medium Sweet Source: EIA Light/Medium Sour 194 PADD III: Gulf Coast In 2010, imports of foreign crude oil by refineries in PADD I totaled over 1.1 million b/d and around 71 per cent of these volumes were light crude (Figure 3.5). PADD I imported 202,500 b/d of crude oil from Canada. About 54,600 b/d was sourced from western Canada and was primarily delivered by pipeline to United s refinery in Warren, Pennsylvania. Deliveries of western Canadian crude oil into this market are expected to remain flat through to CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

19 3.2.2 PADD II (Midwest) PADD II has a total refining capacity of 3.7 million b/d and in 2010, received almost 1.4 million b/d of foreign sourced crude oil, over 60 per cent of which were heavy crude oil volumes. (Figure 3.6). Crude oil from western Canada totaled over 1.2 million b/d, making Canada the primary supply source. Figure PADD II: Foreign Sourced Supply by Type and Domestic Crude Oil Total refining capacity = 3,736 Heavy 830 thousand barrels per day The Midwest region is currently Canada s largest market due to its close proximity, large size and established pipeline network. In the past there was very little need for pipeline infrastructure to export oil beyond this market due to the large refining capacity within the region. This situation has changed with both the increase in local production and the increasing imports of crude oil from western Canada, resulting in supplies exceeding the region s crude oil processing capacity. There are plans for some refineries to upgrade and increase their capacity for refining heavy crude oil in the near future but the growth in supplies of heavy western Canadian crude oil is expected to exceed the additional volumes that could be processed at refineries in this market. In addition, there is a growing build up of light crude oil inventory as domestic production increases as well as the expectation of increased Canadian exports into the region with the recent startup of the Keystone Pipeline. Northern PADD II 1,915 Domestic Crude * Includes small volumes of Medium Sweet Source: EIA Light Sweet* 329 Light/ Medium Sour 208 Northern PADD II consists of North Dakota, South Dakota, Minnesota and Wisconsin. There is one refinery in both North Dakota and Wisconsin and two refineries in Minnesota. These four refineries have a total refining capacity of 487,000 b/d. In 2010, foreign imports into northern PADD II were 279,800 b/d, all sourced from western Canada. Imports of western Canadian crude oil are expected to grow to 348,600 b/d by (Figure 3.7). PADD II can be further divided into the Northern, Eastern, and Southern PADD II states. The primary market hubs within PADD II are Clearbrook, Minnesota (Northern PADD II states), Wood River Patoka, Illinois (Eastern PADD II states), and Cushing, Oklahoma (Southern PADD II states), and will be discussed in the following subsections. There is ample pipeline capacity through the Minnesota Pipeline system to enable Minnesota refineries to be exclusively supplied by western Canadian crude oil if market conditions align. Figure 3.7 PADD II (North): Forecast Western Canadian Crude Oil Receipts Total refining capacity = Light Synthetic Conventional Light Sweet Conventional Medium Sour Heavy Source: 2011 CAPP Refinery Survey 2013 thousand barrels per day Crude Oil Forecast, Markets & Pipelines 12

20 Table 3.1 Summary of Major Announced Refinery Upgrades in Eastern PADD II Operator Location Current Capacity (thousand b/d) Scheduled In-Service Description WRB Refining Roxana, IL Add a 65,000 b/d coker; increase total crude oil refining capacity by 50,000 b/d; increase heavy oil refining capacity to 240,000 b/d BP Whiting, IN 400 Late 2012 to mid 2013 Construction of new coker and a new crude distillation unit Marathon Detroit, MI 102 Mid 2012 Increase heavy oil processing capacity by 80,000 b/d and increase total crude oil refining capacity to 115,000 b/d Eastern PADD II Eastern PADD II consists of Michigan, Illinois, Indiana, Kentucky, Tennessee and Ohio and has 13 refineries with a total refining capacity of 2.4 million b/d. In 2010, western Canadian crude oil accounted for 874,500 b/d or 85 per cent of the total foreign imports into the region. There are several refining expansion projects that will be starting up in the next few years that are designed to process heavy crude oil sourced primarily from western Canada. (Figure 3.8). Table 3.1 summarizes the projects designed to process additional volumes of Canadian crude oil. Figure 3.8 PADD II (East): Forecast Western Canadian Crude Oil Receipts 2,000 1,800 1,600 1,400 1,200 1, Total refining capacity = 2, Light Synthetic Conventional Light Sweet Conventional Medium Sour Heavy Source: 2011 CAPP Refinery Survey 2013 thousand barrels per day Southern PADD II Southern PADD II has seven refineries located in Kansas and Oklahoma with a total refining capacity of 807,000 b/d. Cushing, Oklahoma is a hub that receives crude oil predominantly from pipelines transporting offshore crude oil delivered by tanker to the U.S. Gulf Coast. This crude oil is then distributed by a number of pipelines exiting the hub which serve refineries throughout the PADD II and PADD III regions. Thus with the recent startup of the Cushing Extension phase of the Keystone pipeline, western Canadian oil producers now have ample access to the Cushing hub and the associated pipeline network in the region. In 2010, refineries in this market received 79,900 b/d of western Canadian crude oil (Figure 3.9). Figure 3.9 PADD II (South): Forecast Western Canadian Crude Oil Receipts Total refining capacity = Light Synthetic Conventional Light Sweet Conventional Medium Sour Heavy 2013 thousand barrels per day Source: 2011 CAPP Refinery Survey 13 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

21 3.2.3 PADD III (Gulf Coast) PADD III is comprised of Alabama, Arkansas, Louisiana, Mississippi, New Mexico and Texas. The 50 refineries in this market have a total refining capacity of 8.9 million b/d, of which a significant portion has heavy crude oil processing capabilities. It is the largest and most complex refining district in the United States and is considered to be potentially well suited and capable of processing Canadian heavy crude oil. In 2010, PADD III imported 5.3 million b/d of crude oil from foreign sources, of which 2.4 million was heavy crude oil. (Figure 3.1). The top five sources of these imports are as follows: Mexico (21 per cent), Venezuela (16 per cent), Saudi Arabia (14 per cent), Nigeria (11 per cent), and Columbia (5 per cent). Deliveries of western Canadian crude oil to this market totaled 119,100 b/d, of which 96,800 b/d was transported through Exxon Mobil s Pegasus Pipeline, which was utilized at capacity and is currently the only pipeline access for Canadian crude oil. In addition, approximately 22,300 b/d was shipped off the Westridge dock in Burnaby, British Columbia and arrived via tanker. About 14,200 b/d of light sweet crude oil was also imported from Atlantic Canada by tanker. In recent years, Venezuela s oil production has been declining due to the natural decline at older fields, maintenance issues and compliance with OPEC production cuts. As domestic consumption continues to rise, the result is a decline in net exports. Venezuela has also been diversifying its export destinations away from the U.S. market. One of the fastest growing destinations for Venezuelan crude oil exports has been China. Despite the expected decline in exports from Mexico and Venezuela, Canadian heavy producers are prevented from increasing their market share on the Gulf Coast due to infrastructure constraints. In 2015, CAPP has estimated that this market could receive at least 380,000 b/d of western Canadian crude oil based on contractual commitments on the Keystone XL pipeline if this pipeline receives its U.S. regulatory approvals. A number of other pipeline projects are also being proposed to transport the current glut of domestic U.S. and Canadian light crude oil in PADD II to the PADD III refinery market. Figure PADD III: Foreign Sourced Supply by Type and Domestic Crude Oil Total refining capacity = 8,996 thousand barrels per day Mexico remains the largest heavy crude oil supplier to the U.S. Gulf Coast despite a five-year decrease in production. Exports are expected to be reduced by at least 110,000 b/d once a long-delayed expansion of the Minatitlan refinery in Mexico is completed in mid The cutback will reduce Mexican exports to its lowest level in 15 years. 2,138 Domestic Crude Heavy 2,399 According to the Oil and Gas Journal, Venezuela has 211 billion barrels of proven oil reserves as of 2011, which represents a significant upward revision making Venezuela s reserves the second largest in the world. This recent update results from the official recognition of the huge reserves of extra heavy oil in Venezuela s Orinoco belt. In 2009, Venezuela signed bilateral agreements to develop four major blocks in the Junin area starting in 2012 and extending to 2014 which would increase total production capacity by 1.2 million b/d. In 2010, Venezuela awarded two more development licenses in the Carabobo region scheduled to start in 2014 that would add another 800,000 b/d of productive capacity. However, considerable uncertainty surrounds future production from the Orinoco region given recent regulatory and operational uncertainties. Light Sweet* 1,223 * Includes small volumes of Medium Sweet Source: EIA Light/Medium Sour 1,671 Table 3.2 summarizes the major refinery upgrades completed over the last year and future upgrades announced for the region. Crude Oil Forecast, Markets & Pipelines 14

22 Table 3.2 Summary of Major Announced Refinery Upgrades in PADD III Operator Location Current Capacity (thousand b/d) Scheduled In-Service Description Hunt Refining Tuscaloosa, AL 72 Dec 2010 Increased capacity from 52,000 b/d to 72,000 b/d. Delayed coker was expanded to double in size to 32,000 b/d. Total Port Arthur, TX 232 Mar 2011 Increased capacity from 175,000 b/d to 232,000 b/d. Project included a 50,000 b/d coker; a 55,000 b/d vacuum distillation unit and a 64,000 b/d distillate hydrotreater. Motiva Enterprises Port Arthur, TX Increase capacity by 325,000 b/d to over 600,000 b/d. Valero McKee, TX Increase capacity by 25,000 b/d. Expansion will process WTI and locally produced crude oil PADD IV (Rockies) PADD IV includes the states of Idaho, Montana, Wyoming, Utah, and Colorado. It has 14 refineries located in four of the five states (there are no refineries in Idaho), and has a total refining capacity of 613,200 b/d. Although PADD IV is smaller than the other core markets, it has been a stable market and foreign imports are supplied exclusively from western Canada. In 2010, PADD IV processed 236,600 b/d of Canadian crude oil or about 44 per cent of its feedstock requirements. Canada is the only source of foreign crude oil to this market. Throughout the forecast period, western Canadian crude oil receipts are forecast to remain relatively flat (Figure 3.11). Figure 3.11 PADD IV: Forecast Western Canadian Crude Oil Receipts 600 Total refining capacity = 613 thousand barrels per day PADD V (West Coast) PADD V includes the states of Alaska, Washington, Oregon, California, Nevada, Arizona and Hawaii. The majority of PADD V is geographically divided from the rest of the United States by the Rocky Mountains. It has very good access to tankers, and is located in close proximity to production from Alaska and California. Nonetheless, this market still depends on foreign imports for a large portion of its requirements (Figure 3.12). For the purposes of the remainder of this report, the PADD V market region will focus only on Washington and California, as these states represent both the current demand and future prospects for western Canadian crude oil. Figure PADD V: Foreign Sourced Supply by Type and Domestic Crude Oil Total refining capacity = 3,261 thousand barrels per day Domestic Alaska Heavy Light Sweet* Light/Medium Sour Heavy *Includes small volumes of Medium Sweet Source: 2011 CAPP Refinery Survey 639 Other Domestic Light/Medium Sour Light Sweet* * Includes small volumes of Medium Sweet Source: EIA 15 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

23 Washington There are five refineries in Washington that have a combined capacity of 638,000 b/d. Alaska is still the primary source of feedstock for these refineries, however, Alaskan production continues to decline. As a result, these refineries are becoming increasingly dependent on imports from Canada and other countries. In 2010, these refineries imported 216,600 b/d of crude oil from foreign sources. The top three foreign sources were Canada (65 per cent), Angola (16 per cent) and Saudi Arabia (7 per cent). In 2010, receipts of western Canadian crude were 151,800 b/d. These receipts are expected to increase slightly in 2011 and remain flat afterwards. Note that 2010 receipts were lower than normally expected due to refinery operational issues during the year (Figure 3.13). Given the small size of this niche market, further development of this market is limited. Figure 3.13 Washington: Forecast Western Canadian Crude Oil Receipts 600 Total refining capacity = 638 thousand barrels per day Although Californian refineries receive the majority of their supplies from California and Alaska, in 2010, 781,200 b/d of crude oil was imported from foreign sources. (Figure 3.14) The top three exporting countries were Saudi Arabia (24 per cent); Ecuador (21 per cent); and Iraq (20 per cent). Canada only accounted for seven per cent of the foreign imports. Production from Alaska has been declining annually since In 2010 production decreased seven per cent from The downward trend in production from both California and Alaska is expected to continue, therefore, California refineries will need to replace their domestic crude oil sources with more imports. Figure PADD V (California): Foreign Sourced Supply by Type and Domestic Crude Oil Total refining capacity = 2, Domestic - Alaska Heavy 339 thousand barrels per day *Includes small volumes of Medium Sweet Light Synthetic Conventional Light Sweet Conventional Medium Sour Heavy Source: 2011 CAPP Refinery Survey California California has 17 refineries with a total refining capacity of 2.1 million b/d. Most of the refineries are located near the coast in the Los Angeles area and in the San Francisco Bay area. These refineries account for almost 95 per cent of the refining capacity in the state. Partly because California has the strictest environmental requirements in the United States for refined petroleum products, these refineries are among the most sophisticated in the world. They have the capability to process a wide variety of crude oil types and are designed to yield a higher proportion of light products, such as gasoline. The three refineries in Bakersfield are smaller and process local California crude oil; they would not be expected to receive Canadian crude Asia Other Domestic Asia is the second largest oil market after North America. Of note, China is the second largest consumer of oil after the United Sates and its economic growth rates are expected to be very strong compared to other countries. Table 3.3 shows oil demand from 2008 to 2011 in the major Asian countries. The International Energy Agency (IEA) forecasts that oil demand from China will grow by six per cent in 2011 with continued strong growth anticipated in the longer term. In 2010, there were increased exports to Asia. 20 * Includes small volumes of Medium Sweet Source: EIA and the California Energy Commission Light/ Medium Sour Light Sweet* 422 Crude Oil Forecast, Markets & Pipelines 16

24 However, there is currently limited pipeline capacity available for the transportation of western Canadian crude oil to the west coast. The earliest that Canadian crude oil producers would be able to increase their market share in Asia is in 2016, if a new pipeline project is approved. Table 3.3 Total Oil Demand in Major Asian Countries million b/d China India Japan Korea Source: IEA Oil Market Report, May Methodology CAPP did not put any constraints on the data submitted by refiners nor were any alternate cases prepared. Some assumptions were made based on discussions with refiners and publicly available information. The CAPP survey categorizes western Canadian crude oil into four main types as follows: 1. Conventional Light Sweet (greater than 27 API and less than or equal to 0.5% sulphur) including condensates and pentanes plus; 2. Heavy (equal to or less than 27 API) including conventional heavy, synthetic sour and crude oil blends such as DilBit, SynBit and DilSynBit; 3. Conventional Medium Sour (greater than 27 API and greater than 0.5% sulphur); and 4. Light Sweet Synthetic. For the purposes of the historical data in this section of the report, the following crude types and definitions apply: Sweet: crude oil with a sulphur content of less than or equal to 0.5% Sour: crude oil with a sulphur content of greater than 0.5% Light: crude oil with an API of at least 30 Medium: crude oil with an API greater than 27 but less than 30 Heavy: crude oil with an API of 27 or less No differentiation is made between sweet and sour crude oil that falls in the heavy category because heavy crude oil is generally sour. 3.5 Markets Summary The United States remains the primary export market for western Canadian crude oil supplies due to its strong demand, geographic proximity and established pipeline infrastructure. Several key facts suggest that growing supplies of crude oil from western Canada could find a market on the U.S. Gulf Coast or world markets once they reach Canada s west coast, including California and Asia. With the recent startup of the Keystone Pipeline to Patoka, Illinois, followed by the extension of this pipeline into Cushing, Oklahoma, crude oil supplies from western Canada into the PADD II market are expected to grow. In the meantime, western Canadian crude oil producers have growing supplies and need to access new markets for this supply. Producers currently have limited transportation options to serve alternative markets in the U.S. Gulf Coast, which is world s largest refining market and over half of the existing capacity can process heavy crude oil. Refineries in this market are looking to replace declining supplies historically coming from Mexico and Venezuela. Demand in California could increase since these refineries get the majority of their crude oil supplies from California and Alaska and production from these states has been steadily declining. The Asian market is expected to grow substantially and access to these markets is an important part of achieving market diversity. This, along with growth in other parts of Asia and India, will increase world crude oil demand, which in a global context, will enhance the importance of Canadian supplies. 17 CANADIAN ASSOCIATION OF PETROLEUM PRODUCERS

25 4 CRUDE OIL PIPELINES Pipelines are an efficient method of transporting large volumes of crude oil over land. Recent decreased pipeline capacity connected to key markets proved that pipeline constraints have a severe impact on the netbacks realized by Canadian producers. Some excess pipeline capacity is essential for industry to manage in times of pipeline maintenance or to ensure flexibility to accommodate new market developments. As crude oil production in western Canada continues to grow, the petroleum industry recognizes the need for new pipeline capacity to both existing and new markets. This chapter reports on the status of and demand for crude oil pipelines into markets in the U.S. and world markets, including Asia, that can be accessed once Canadian supplies reach the west coast. Figure 4.1 Canadian and U.S. Crude Oil Pipelines - All Proposals Kitimat Kinder Morgan TMX Northern Leg Burnaby Trans Mountain Enbridge Gateway Edmonton Hardisty Kinder Morgan TMX2 Expansion TMX3 Expansion Anacortes Enbridge Alberta Clipper Enbridge (North Dakota) Expansion Salt Lake City Express TransCanada Keystone XL Platte TransCanada Keystone & Cushing Extension Centurion Pipeline Guernsey Spearhead South 1 - Enterprise/ETP Cushing-Gulf 2 - Enbridge Monarch 3 - Keystone Cushing MarketLink Houston Clearbrook St. Paul Cushing Superior BP Enbridge Capline Mid Valley Sarnia Montréal Flanagan Chicago TransCanada Keystone East Lima Wood Spearhead North Patoka River Mustang Port Arthur Enbridge Line 9 Reversal ExxonMobil Pegasus Portland Canadian and U.S. Oil Pipelines Enbridge Pipelines, Alberta Clipper and connections to the U.S. Midwest Kinder Morgan Express Kinder Morgan Trans Mountain TransCanada Keystone Proposed pipelines to the West Coast Existing / Proposed pipelines to PADD III Expansion to existing pipeline Crude Oil Forecast, Markets & Pipelines 18