From Deep Underground to Your Gas Tank

Posted on: Monday, August 29th, 2016

From Deep Underground to Your Gas Tank : Canada’s Unsurpassed Record of Supply of Petroleum Products to Consumers

By Michael Ervin, Senior Vice-President, Kent Group Ltd

In the spring of 2016, Northern Alberta experienced a widespread and devastating forest fire that, among other impacts, forced the complete evacuation of Fort McMurray, a town whose name is synonymous with Canada’s oil industry.

Media coverage of this catastrophe was understandably extensive in its exploration of the fire’s potential impacts at personal, community and national levels.  The spectre was also raised of the fire’s potential impact on the supply of petroleum products to the region, given that much of Canadian crude oil production originates in Northern Alberta.

These concerns were exacerbated by a concurrent but unrelated production issue at one of the three refineries that operate in the Edmonton area. Would any of the three refineries be able to receive and process crude oil during the fires? Would production issues at one of these refineries result in consumers not being able to buy gasoline or diesel fuel?

DOUSING THE FLAMES

We now know that such fears were unfounded. Although a number gas stations in Western Canada were impacted by the refinery outage that occurred – having no gasoline to sell – we are not aware of any consumers who were left unable to purchase gasoline at an alternate nearby facility. Supply of diesel fuel and other petroleum products were largely unaffected by the forest fires or refinery outage.

Unplanned refinery outages are infrequent (a “newsworthy” outage happens in Canada roughly once a year), but given the importance of petroleum products in our daily lives, the supply concerns that play on the minds of consumers and the media are understandable. How worried should we be when we hear of such events however?

Instances of region-wide or even city-wide unavailability of everyday petroleum products such as gasoline or diesel simply do not exist in the over 40 years that the Kent Group and MJ Ervin & Associates has been observing the Canadian downstream (refining and marketing) petroleum industry.  In fact, it is difficult to imagine any other industry with a better track record for assurance of supply.  This is a testament to the robust supply infrastructure and those who are responsible for its operation.

PETROLEUM SUPPLY 101

The supply of petroleum products is based on facilities that produce and store petroleum products along the “value chain”, and the facilities that move those products from one point along the value chain to the next.

Canada’s Fuel Supply Infrastructure

Dean Armstrong, National Renewable Energy Laboratory. High Octane Fuel: Terminal Backgrounder

Source: Dean Armstrong, National Renewable Energy Laboratory. High Octane Fuel: Terminal Backgrounder 

All of these facilities are generally very expensive assets (a typical modern refinery for example, would have a price tag of about 10 billion dollars), and are only built to enough capacity to meet a reasonable degree of projected demand.  Accordingly, highly sophisticated supply planning is required to ensure
that product arrives in the right place, at the right time, and in the right amount to meet the needs along every point in the value chain.
There are so many variables be factored into such supply planning, that a process known as Linear Programming (LP) modeling is employed. Think of a spreadsheet with hundreds of inter-connected equations such that when one value is altered (the projected price of crude oil for example), hundreds of other values change as well.

This process of LP modeling has the intended outcome of “supply optimization”: matching the supply of crude oil (and at the refiner level, refined petroleum products) to the demand for gasoline, diesel fuel and other products, at the least cost to the industry and at the most competitive price to the consumer.

WHEN THINGS GO BUMP IN THE NIGHT

Of course, the best efforts at LP modeling cannot foresee the unforeseeable; an unplanned refinery outage for example. Supply planners respond to such disruptions in a number of ways. Alternate supply sources are sought, even those of competitors. Deliveries are more closely monitored to allow for inventory draw-downs where possible. If necessary, supply to some retail outlets is curtailed, while at the same time ensuring that markets with few gas stations are kept supplied.

In the case of a prolonged supply disruption, fuel products are often shipped from refineries that do not normally supply the affected area. In some regions of Canada, the infrastructure to accomplish this is readily available via pipelines or marine transport. In other regions, this is more problematic: Western Canada for example, has extensive pipeline infrastructure, but the flow of fuel products is almost entirely out of this region, not into it.

Significant supply disruptions have the potential of causing wholesale prices (and consequently retail or end-user prices) to rise.  While this is often viewed as opportunistic pricing on the part of petroleum refiners or marketers, it is a market response to any commodity in short supply. The higher wholesale price has the added benefit of attracting wholesale product into the affected region, thereby reducing the risk of more serious supply disruption to customers.

As inventories rebuild, either due to inter-regional supply or due to a resumption of normal production and supply infrastructure, wholesale prices invariably return to historical levels relative to their underlying crude prices (the difference between the two often referred to as “refiner margin” or “crack spread”).

FILLING WITH CONFIDENCE

How gasoline reliably finds its way from deep underground (as crude oil) to a refinery, then to a supply/distribution terminal, then to a consumer’s vehicle through a neighborhood fuel/convenience store, is rarely thought of as one stops for gas on the way home from work. It’s worth a thought however.

 

About the author:

 Michael Ervin is the Senior Vice-President at Kent Group Ltd, a Canadian-based firm that provides world-class excellence in data, analytics and consulting services relating to the downstream (refining and fuels marketing/retailing) petroleum industry.

Mr. Ervin has had a successful and varied career in the downstream petroleum industry spanning over thirty-five years. Mr. Ervin is a well-known media commentator on matters relating to the petroleum industry, especially on the subject of retail fuel prices.