The question of how to improve oil, gas and liquids markets each have the same answer: move production to the U.S. Gulf Coast. Even before the current price downturn, producers were attempting to move volumes south in order to improve optionality, reduce bottlenecks and gain greater netbacks.

The price slump has resulted in a pullback in the rig count, as well as a reduction in midstream buildout, but the ability to move production to the U.S. Gulf Coast remains attractive, especially to Canadian heavy crude producers.

According to a new report from the Canadian Energy Research Institute (CERI), titled “Heavy Barrel Competition in the US Gulf Coast: Can Canadian Barrels Compete?” Canadian heavy crude needs to find new outlets in order to alleviate current price markdowns. The bulk of Canadian production is presently shipped to the Midwest, where it is facing increased competition from domestic U.S. production.

“This situation provides Canadian producers a financial incentive to expand market access in the United States, Canada and beyond. It also highlights the risk of overreliance on limited markets and the need for options,” the report said.

While the U.S. Gulf Coast represents one of the largest refining centers in the world, it is not a guarantee that increased access to the region for Canadian crude will be the panacea the market is seeking because there will also be competition with imports from Mexico, Venezuela, Brazil and Ecuador.

However, CERI noted that over the past decade imports from Mexico and Venezuela have decreased by more than 1 million barrels per day (bbl/d) due to a decline in their reservoirs, as well as inadequate upstream investments.

“This leaves a considerable gap for Canadian producers to establish a new market share in the Gulf. If oil sands could displace most of the Mexican and Venezuelan imports, the opportunity for bitumen blends and conventional heavy oil could be approximately 1.5 MMbbl/d,” the report said. CERI anticipates that heavy crude production out of Western Canada will increase from 2.6 MMbbl/d in 2015 to 4.7 MMbbl/d in 2035. To meet this level of demand will require larger investments in pipeline infrastructure, not only to the U.S. Gulf Coast, but also to the East and West coasts of Canada to meet export demand to Europe and Asia, respectively.

There has been increased demand for Canadian crude in the Gulf Coast market as reflected by several Enbridge Inc. pipeline projects that have been completed in the last few years, including Seaway Pipeline reversal and the new Flanagan South and Southern Access pipelines. Additionally, rail capacity from Western Canada and Cushing has been expanded and is expected to grow by nearly 1 MMbbl/d to 2018.

Demand for Canadian crude to the Gulf Coast is expected to increase by 2.5 MMbbl/d to 3.9 MMbbl/d by 2035, depending on how much export capacity will be available on the Canadian coasts. “It is clear that under the current production growth forecast, transportation infrastructure from Western Canada to the U.S. seems to be sufficient to transport the predicted potential heavy exports. However, if none of the major export pipelines proposed come online and all heavy exports are directed to the U.S., transportation capacity could be heavily constrained and dependent on expansions of the railway system,” the report said.

The bulk of Canadian exports will continue to be directed to the Midwest due to existing contracts and infrastructure that will take up 60% of these volumes with the remaining 40% making their way to the U.S. Gulf Coast.

While rail offers improved optionality for shippers, it is also more expensive than pipeline with costs between $12 per bbl to $20 per bbl for rail compared to $5 per bbl to $13 per bbl to ship via pipeline. Consequently, producers would prefer more pipe infrastructure to be built in order to obtain the highest netbacks.

“Canadian producers’ willingness to spend more on alternate transportation and ship their product using rail, barge or tanker seems to have shifted after crude oil prices started to fall dramatically. Most Western Canadian heavy crude oil production comes from very expensive oil sands mining or in situ steam heating operations, which are designed to produce consistently for decades and are costly to shutter in a downturn. Under the current price market, crude netbacks for heavy crude oil production in Western Canada are dramatically low, further justifying investment in shipping to the U.S. Gulf Coast,” according to the report.

Frank Nieto can be reached at fnieto@hartenergy.com.