The large deposits of ultra-heavy, bituminous oil that lie in Canada’s Albertan sands and in the river beds of the Orinoco valley in Venezuela are only now becoming a commercial reality. The scale and cost of the operations required to get the oil out of the ground and upgrade it have until recently been too great to allow profitable exploitation. In the space of a few years all this has changed. Last year over 650,000 bpd of heavy oil was produced from the Canadian sands, and now Venezuelan heavy oils are also reaching the market, potentially adding 400,000 bpd to the country’s conventional oil production by the end of this year.
Although the two regions are estimated to contain over 3 trillion bbl of bituminous oil, far outstripping even the reserves of the Middle East, the volumes produced are likely to be small in relation to global production, though. Nevertheless, the impact on world markets could be disproportionately large because of the proximity of the two heavy oil producers to the US, where most of the new crude supplies will be marketed.
The increasing viability of these large oil deposits is due principally to improvements in technology, which have slashed the costs of getting the oil out of the ground and upgrading it into a marketable product. Operating costs for the two largest Canadian producers of synthetic crude have halved in the last twenty years to around $12/bbl. With the high-grade oil trading close to parity with WTI in the US mid-continent, this makes syncrude operations relatively robust even when oil prices are low.
Canada is already exporting almost 1 million bpd of crude to the US. Although some of the new syncrude will replace declining volumes from conventional production, most of it will be sold to refiners in the US mid-continent, where it will compete directly with WTI and domestic pipeline grades such as Light Louisiana Sweet. Almost all the Venezuelan syncrude will end up in US Gulf Coast refineries, although not all will be traded on the spot market. Two of the three Venezuelan projects currently in operation have long-term contracts with refiners – usually the project’s investors - but the third, which will start producing high-quality, low -sulphur syncrude this year, is planning to sell the bulk of its output on the Gulf Coast spot market, where it will compete with domestic and other imported light, sweet grades.