July 25, 2013 Bowen

Is Canada Losing Billions in Oil Production Revenue?

Suncor Energy Inc. and Canadian Natural Resources Ltd. are two of the largest oil sand producers based in Alberta. On the surface, they operate in similar manners, producing hundreds of thousands of oil barrels a day, much of which is funneled into the country’s gas stations and auto tanks. However, behind the scenes, strikingly different processing procedures are being implemented—one of which could be costing Canada billions in annual oil production revenue.

Once the oil is pulled from the sands, it’s up to the production companies how that oil is then processed and refined. Suncor, on the one side, processes nearly all of its oil in its own refineries, keeping all costs and production value in-house. It is one of the exceptions though, as CNRL (like most Canadian oil producers) exports the crude oil to refineries in the Midwest U.S., effectively transferring wealth across national borders.

Here’s how the economics breaks down: There can be an enormous difference in what refineries pay for crude oil or bitumen and what it gets paid for the final refined product. This is known in the industry as “crack spread.” To put this in perspective, the crack spread the Midwest refineries are experiencing, thanks to cheap access to Canada crude production, is nearly five times that of coastal refineries which are forced to pay world prices for their supply.

Canadian oil companies like CNRL are forced to sell their product at an enormous discount to refineries, whereas Suncor keeps the crack spread profits within its private operations. One of the big reasons Canadian oil producers are trapped in this situation is a marked lack of a pipeline infrastructure that would allow them to transport their raw materials to other markets outside U.S. subsidiaries. Even if CNRL and others boost production, it only means they’ll have to send more over the U.S. border to get refined.

If nearly 2 million barrels of oil are being exported to U.S. refineries per day, with the current crack spread reaching $50 per barrel, that’s $100 million per day being soaked up by non-Canadian refineries and markets. Per year, that’s hitting $35 billion worth of revenue that’s being practically handed over to the U.S.

The solution? Rather than focusing on simply doubling oil production, companies should perhaps more immediately invest in establishing their own refinement methods to keep as much profit as possible from slipping through their fingers.



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