Recently, we produced a series of blog posts that discussed innovation developments in the Canadian refining sector; for refiners, these advancements focus on improving efficiency and environmental performance, including reducing GHG emissions. While the innovation wheel moves forward, it’s also important to understand the fundamental economics of refining, and the challenges and opportunities that affect and drive the sector.
This week, we highlight three economic drivers in the Canadian refining sector: Efficiency, Balancing Production & Demand, and Competitiveness.
Efficiency: producing more with less.
Today, Canada’s petroleum refining sector consists of 16 refineries in seven provinces, a far cry from the over 40 refineries that operated in the 1970s. However, even with fewer refineries, the sector continues to meet the fuel needs of Canadians and contribute billions to Canada’s economy every year.
How?
Over the past 40 years, the industry went through significant structural changes. Smaller, less efficient facilities closed while others expanded to increase their processing capacity and operate more efficiently to remain competitive (economies of scale).
Having fewer refineries did not decrease total refining capacity. In fact, it more than doubled so that our refining capacity now surpasses domestic demand for refined products (see Canadian Refining Capacity vs Number of Refineries) creating export opportunities. In addition, refining has benefitted from ongoing technological improvements creating more energy efficient facilities.
Production & market demand: The refining industry is driven by product market demand, and refinery production adjusts to meet it.
In total, the demand for refined petroleum products in Canada has been relatively flat over the past decade and is forecast to slightly decrease by 2040 compared to 2018 (NEB Canada’s Energy Future 2018 – Reference Case). However, refined petroleum products will continue to supply a big portion of Canada’s energy end-use demand even as the fuels mix diversifies with emerging energy (see Canada’s Energy End-Use Demand).
Demand varies seasonally, by region and by required product mix. The output from a refinery typically comprises 75% transportation fuels (gasoline, diesel and aviation fuel) with the remaining 25% being home heating oil, lubricants, heavy fuel oil, asphalt and petrochemical feedstocks for other industries. It’s commonly perceived that all refineries are similar but, in fact, no two refineries are identical! One factor that determines a refinery’s configuration is the market it serves and the slate of products required to meet that market’s demand. Refineries do share essential processes such as separation of hydrocarbon, conversion to higher-value products, treatment of unwanted elements and blending to comply with standards and regulations. But the specific process units and their configuration can vary substantially.
The more complex the refinery is (equipped with secondary units such as catalytic crackers, hydro-crackers and fluid cokers), the higher the ability to convert low-value raw material to high-value end products.
Competitiveness: A balancing act
The refining sector in Canada operates in a highly competitive North American, and increasingly global, market. For refiners to remain profitable and open for business, they need to constantly optimize a number of operating variables in a very dynamic business environment that includes economic, commercial, technical, and regulatory risks. It is a complex balancing act that considers crude inputs, product slate, refinery configuration, energy management, logistics and transportation, and regulatory compliance costs.
In the end, profitable refining operations that deliver an adequate return on investment are a function of a complex set of variables underpinned by basic supply and demand dynamics and shaped by global competition.
Interested in learning more? The Economics of Petroleum Refining provides more detailed information on the economics that underpin the refining business in Canada.
