Heavy Crude: Where Will All the Barrels Go?

Heavy crude oil is produced in every region of the world, and production volumes are set to increase from 9.9 million barrels per day in 2011 to 15.5 million daily by 2020 and 15.8 million per day by 2025. The lion's share of this increase will come from the Americas and the Middle East. We will focus here on Canada and Venezuela, where the disposition of these barrels will change dramatically.

Presently, most of South America's heavy crude is exported to North America, primarily to the U.S. Gulf Coast PADD District 3, which has the world's largest heavy crude processing capacity. Of Venezuela's total heavy crude exports of 1,022 million barrels per day in 2011, 782 million per day went to the U.S., 95% of it to PADD 3 and the rest to PADD 1. Venezuela, with its ambitious plans to increase production from the Orinoco Belt, will provide the majority of new production from South America.

The Orinoco Belt contains the largest extra-heavy oil resource in the world, with 1.3 trillion barrels of original oil in place, according to the U.S. Geological Survey, and 200 billion barrels of reserves, according to PDVSA, the national oil company of Venezuela. Currently, four joint-venture projects are producing about 500,000 barrels per day of extra-heavy crude, most of which is upgraded to a lower-density synthetic crude oil. PDVSA has signed six new joint ventures with Eni, Chevron, Chinese companies and other national oil companies, and has signed two memorandums of understanding, with Rosneft and Sinopec.

If all of these projects are developed on schedule, Venezuela will be producing 2.9 million barrels per day from the Orinoco by 2020, of which just over half will be upgraded into synthetic crude and the remainder blended with a portion of the synthetic crude and marketed as a bitumen blend.

Under Hart Energy's delayed Orinoco production scenario, the volume of heavy crude entering the export market from Venezuela will be 2.4 million barrels daily by 2020, including conventional heavy oil from mature fields. This is more heavy crude than could be absorbed by the U.S. Indeed, if the planned pipelines and other infrastructure are built, the U.S. will obtain nearly all of its heavy crude from Canada. This will happen even with the decline in heavy crude imports from Mexico. Furthermore, Canada will produce more heavy crude than can be used in North America and will begin to export outside the region before 2025.

Thus, there will be very little heavy crude entering North America from outside the region. The rapidly increasing exports from Venezuela will be sent elsewhere.

Imports of heavy crude into the U.S. from outside Canada and Mexico will decline rapidly, from 1.9 million barrels per day in 2011 to about 300,000 per day in 2020 as Canadian production ramps up. With the North American refining system saturated with Canadian heavy crude (and domestic shale oil), where will the crude oil entering the export markets be processed?

Some will be used in South America. For example, a portion of Venezuelan heavy crude sent to Caribbean nations and to Ecuador will go to Brazil in the future. A portion of the heavy crude produced in the North Sea and West Africa will continue to be processed in Europe. Middle Eastern heavy crude will also increase rapidly, and some will be processed in the region.

However, this still leaves large volumes in the export markets. Logically, it will be processed in the region with the greatest demand growth, primarily Asia, and to a lesser extent, Africa. These regions will have to add heavy crude processing capacity to sustain economic growth.