Western Canadian Refining Margins Return to Earth in 2009
Baker & O'Brien's PRISMTM Provides Insight into Lower 2009 Margins
August 23, 2010
Baker & O’Brien recently released its 2009 refining industry data service update for Canada to the firm’s PRISM subscribers. This update highlights just how difficult the year was for Canadian refiners, as margins weakened across all major markets. The overall average cash margin declined in 2009 by over $6 per barrel1 from 2008 levels, although there was wide variation amongst the provincial groups. This compares to the decline experienced during 2008 of less than $1 per barrel from the previous year. Meanwhile, cash margins in 2009 for Western Canadian refineries fell to half of 2008 levels, with an $11 per barrel decline resulting from the collapse of the diesel-gasoline price differential.
Even though the cash margins of Western provincial refineries declined during 2009, this group continued to significantly outperform refineries in other provinces. This ability of the Western refineries to outperform their Eastern counterparts is due in large part to location advantages. The Western refineries process local crude oils, which have limited access to outside markets and are available at lower cost. On the supply side, there is less competition in Western Canadian product markets because of significant logistical constraints for delivery of refined products into the region. In particular, the niche markets served by the land-locked Alberta refineries have little economic alternatives.
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These same logistical constraints mean that Western provincial refineries tend to keep their production rates in-line with local demand patterns. This was demonstrated during 2008, when total inputs to Western refineries declined significantly, by 74,000 B/CD (8.4%), from 2007.
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Although inputs to refineries in Quebec and the Atlantic provinces did not show the same significant reduction as seen in the Western provinces, their struggle in 2009 to maintain margins continued. Competition from North Atlantic refining rivals in the United States (U.S.) and Northwestern Europe, along with decreased demand for light products in their target markets have led to further rationalization of the industry. In early 2010, Shell announced plans to shut down their East Montreal refinery and convert it into a fuel terminal.
Margins for Canadian refiners are likely to remain near 2009 levels until demand growth for refined fuels in North America returns to historically higher levels. Closure of other Eastern Canada refining capacity may occur if operators anticipate a lengthy recovery in U.S. and European economies.
1 All currencies expressed in US$.
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