Refiners in the United States are preparing for an increase in the volume of heavy crude oil from Canada over the next five years, as production from the oil sands is set to increase sharply. The industry is responding by upgrading and adding heavy oil capacity at various refineries.

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Canadian Production
The Canadian Association of Petroleum Producers (CAPP) expects production from the oil sands to increase from 1.5 million barrels per day in 2010 to 2.2 million barrels per day by 2015. This growth under the most optimistic scenario will continue and reach 3.7 million barrels per day by 2025.

This extra production will be mostly heavy oil, which CAPP defines as sour crude oil or bitumen diluted with light crude oil or condensate. This type of crude oil is dense with a high viscosity and is more complex to refine into various end products. Many refiners are upgrading and expanding facilities to handle this heavy oil coming in from Western Canada, as these units were originally built to handle lighter oil. These refiners are concentrated mostly in PADD II, which covers the Midwestern United States.

The Players
Cenovus (NYSE:CVE) and Conoco Phillips (NYSE:COP) are involved in a joint venture that operates the Wood River refinery in Illinois. Wood River has a current capacity to refine 306,000 barrels of oil per day, and is being expanded and upgraded by the two companies. The expansion will add capacity of 50,000 barrels per day and increase heavy oil refining capacity to 240,000 barrels per day.

Marathon Oil (NYSE:MRO) owns a refinery in Michigan, and is involved with the Detroit Heavy Oil Upgrade Project. This upgrade will increase total refining capacity from 106,000 barrels per day to 120,000 barrels per day and increase heavy oil refining capacity by approximately 80,000 barrels per day. The company expects the project to be completed by 2012.

BP (NYSE:BP) operates the Whiting refinery in Indiana and began an upgrade here in 2008. The company is adding a petroleum coker and reconfiguring the distillation unit to handle heavy crude oil. The project is expected to be completed in late 2012.

Motiva Enterprises is a joint venture of Royal Dutch Shell (NYSE:RDS) and Saudi Aramco that owns three refineries and other assets in the United States. The company is expanding the capacity of its refinery in Port Arthur, Texas, from 325,000 barrels per day to 600,000 barrels per day. Although the expansion will enable the refinery to handle lower quality crudes, additional Canadian crude oil cannot be transported here due to a lack of pipeline capacity.

The Bottom Line
The refining industry is in the midst of upgrading and expanding refineries in the United States to handle the expected increase in production of heavy crude oil from Canada over the next decade - this production is coming from the rapid development of the oil sands in Canada. (For additional reading, also check out our Oil And Gas Industry Primer.)

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