Access to markets
Market access constraints emerged as a high-profile economic challenge for Canadian energy producers — and Canadian governments — in 2012. And it’s one that’s expected to loom large through 2013 and beyond.
The issue is not a new one for our industry, but a 'perfect storm' of infrastructure limitations, changing market dynamics and intense public scrutiny served to bring the issue of access into sharp relief in 2012 and early 2013. The elements of that storm included:
- Thanks to new technologies, including horizontal drilling and multi-stage fracturing, the United States continued to enjoy a domestic boom in tight oil production. The Bakken shale field beneath North Dakota and the Texas-based Permian and Eagle Ford formations are among the focal points of this boom.
- Surging U.S. oil production, along with significant production growth from Canada's oil sands industry, comes at a time when the pipeline capacity to take that supply to market is increasingly bottlenecked. Almost 99% of Canadian oil exports go to the U.S., the bulk of it landing in the oversupplied inland market.
- As a result, prices for western Canadian heavy oil and synthetic crude sold at higher-than-normal discounts against the benchmark U.S. crude West Texas Intermediate (WTI). That Canadian discount was further compounded by differentials between WTI and the international Brent crude benchmark.
- Proposals for new or expanded pipeline infrastructure that would take oil sands supply to important markets — including the refinery-laden U.S. Gulf Coast or to Canadian tidewater ports for potential export to Asia — faced significant public scrutiny. Pipeline opponents raised concerns ranging from the protection of local wetlands to broader objections about enabling North America's oil addiction and the greenhouse gas (GHG) footprint of oil sands crude.
As we prepared this latest Report on Sustainability, the market access challenge proved to be a top-of-mind issue for Suncor investors, employees and other stakeholders. Here are some of the most common questions they asked us:
How serious is the market access issue for Suncor?
Suncor's integrated business model has given the company a decisive competitive advantage amid the market dynamics generated by the tight oil boom and bottlenecked pipelines. In 2012, Suncor captured global crude pricing on approximately 96% of its upstream crude production. About one-third of our production is sold directly into the world market, with the remaining production from oil sands sold at the discounted price. But with our strong suite of inland refineries, as well as our robust supply and trading activities, we are able to offset that discount, because refined products are sold based off the higher world price.
Currently, Suncor has good access to markets, and we don't see many constraints over the next five years. But in the longer term, we want access to more diverse markets. We also believe the responsible development of Canada's oil sands can make a positive contribution to meeting global energy demands, which the International Energy Agency projects will grow by one-third by 2035 — with oil forecast to remain the primary source in the world's energy mix.
Beyond its impact on Suncor, price differentials for Canadian oil represent a significant loss in revenues for Canadian and provincial governments — another reminder of the close connections that exist between energy, the economy and social well-being. Linking one of the world's largest sources of oil supply to some of the world's largest energy markets would benefit the Canadian economy, while also improving global energy security.
What is Suncor doing to expand market access?
This is not a new issue for Suncor; we've been working on it proactively for nearly a decade. We've supported the development of pipeline infrastructure that would increase our access to markets and the flexibility of our operations — including new or expanded pipelines to the U.S. Gulf Coast, the west coast of Canada and Eastern Canada. We also support the proposed reversal of Line 9 to move oil from Sarnia, Ont. to our refinery in Montreal, Que.
There is a comprehensive regulatory framework in place that governs the development and operation of pipelines and other large infrastructure projects. The key is to ensure pipeline development is done responsibly and that is the role of the respective regulatory bodies.
Are rail lines an option for improving market access?
The movement of oil by rail is growing in both Canada and the United States. There are pros and cons to this mode of transport. Rail can move crude faster than trucks and requires less fuel, which means less GHG emissions. Rail also has some advantages over pipelines, including faster delivery, no requirement for a diluent and more flexibility in terms of market access.
Given the uncertainty over proposed pipeline projects, Suncor and other oil sands companies have been evaluating rail as one potential bridging solution. But as a long-term, large-scale solution, rail has its limitations. It would require significant capital investment in new tank cars, loading facilities and unloading terminals. From a sustainability perspective, the large-scale movement of oil by rail would be more costly and more carbon intensive than doing so by pipeline. Given the sizable capacity advantage of pipelines, and their overall safety and reliability record, this kind of infrastructure appears to be the most efficient way to transport oil sands crude to market.
Read more about rail crude transport in OSQAR
Does the U.S. tight oil boom spell trouble for the oil sands industry?
Many stakeholders have asked if the combination of declining U.S. energy demand and significantly higher domestic production means our industry is in danger of losing its best — and, at this point, virtually only — export customer. The short answer: no, not any time soon.
Canada is the largest single foreign oil supplier to the U.S., accounting for nearly 25% of all U.S. crude oil imports. Despite the impressive increase in U.S. light oil production, forecasters say the U.S. will require oil imports for the foreseeable future to fully meet domestic demand. Canada and the Canadian oil sands remain well positioned to meet that demand.
In the longer term, though, it simply makes sense for Canada to have more than one customer for its oil. That's why Suncor will continue to support safe and responsible alternatives for linking Canadian oil supply to other world markets.
Read more about Canada-U.S. energy relations in OSQAR