While Canadian crude production has been growing for the past decade, the country’s refining industry hasn’t been able to reap the full rewards of this growth. In fact, some of these refineries are importing light crude to maintain run rates. Despite having the 11th largest total refining capacity in the world, Canada’s refining industry is only processing about 30% of domestic production. 

According to a recent report from Canada’s National Energy Board, Canadian Refinery Overview: Energy Market Assessment,” not all of the country’s refineries are able to process heavy crude. However, the bulk of the country’s domestic crude production is heavy crude from the Alberta oil sands.

In total, Canadian refineries are operating at a high level without much available capacity for additional volumes. In 2017, Canadian refineries operated at 84% of capacity with the majority of the downtime being attributed to planned and unplanned maintenance. More than half of the crude processed in 2017 at Canadian refineries was light conventional—much of which was imported, and a bit more than one-third of refinery receipts were from the oil sands. The rest was conventional heavy oil.

“Most of the refineries in Canada, built when there were abundant supplies of light crude oil, were not configured to process growing volumes of heavy crude oil from the oil sands,” the report said.

Canada’s refining industry was in the process of contracting while producers were improving their ability to extract volumes from unconventional sources like oil sands. Crude oil receipts at Canadian refineries haven’t grown since 2000, even though domestic production has increased exponentially since 2010.

Much of this production growth has been led by the Alberta oil sands, which are also geographically isolated from many of the country’s refineries. However, the recent reversal of Enbridge Inc.’s (NYSE: ENB) Line 9 pipeline is now providing these producers with the capacity to transport up to 300,000 barrels per day (bbl/d) to refineries in Montreal.

Still, eastern Canadian refineries are expected to continue to import crude to meet their refining needs and therefore remain exposed to the international market. Though refineries can be converted to handle heavy volumes, this requires the addition of expensive equipment like cokers. Heavy crude also yields more low-value products, which makes such investments a tough pill to swallow for refiners.

To better balance its domestic production and the amount refined domestically, more pipelines and refineries closer to resource basins would be helpful. Additional refineries in the country could also open the possibility of more exports since most Canadian refineries focus on domestic needs.

Ironically, one region that is reaping the benefits of production from the Canadian oil sands is the U.S. Gulf Coast (USGC), which has been refining approximately 800,000 bbl/d of heavy crude production from western Canada. According to a new report from IHS Markit, “Looking South: A Canadian Perspective on the U.S. Gulf Coast Heavy Oil Market,” this figure could further increase to more than 1.2 million bbl/d, or one-third of the region’s heavy oil production, by 2020.

It’s a win-win for both countries: The Gulf Coast has the largest concentration of heavy oil refineries in the world and more than 90% of the volumes processed in the region are imports. Making matters more difficult for USGC refiners is that two of the most important suppliers for these imports—Mexico and Venezuela—are experiencing declines in production and increasing the need for new supplies at USGC refineries.

While Canadian producers have easy access to the USGC via pipe and rail transportation, they run the risk of becoming over-reliant on U.S. refiners. They could face future competition for market share from Latin American producers.

“Although Canadian imports are of similar quality as Latin American crudes, they are not identical. There is a point when more extensive modifications will be required to tailor facilities to accommodate greater volumes of the Canadian heavy crude,” Kevin Birn, executive director, IHS Markit, said in a company release. “In a situation where the level of competition is high, Canadian crude may have to adjust price to incentivize refiners to make additional modifications and/or displace greater quantities of offshore imports.”

Though there are alternatives such as customizing oil sands blends or developing new processing technologies, they would require major investment of time and money. The likelihood is that Canadian producers will continue to face risks as production grows.

“The reality is that Canada…maintains an almost singular reliance on one market. Such a situation is unique in the world and will always carry associated concerns,” Birn said.