About Crude Oil and Petroleum Products

Key Descriptors

  • Canada's proven oil reserves are second only to Saudi Arabia's. At the end of 2006, Canada's remaining established reserves amounted to 179 billion barrels, of which more than 95 per cent are in the form of crude bitumen in oil sands.
  • Crude oil production has been increasing fairly steadily during the last two decades. While conventional resources continued to account for more than half of crude oil production, most of the production growth in recent years has come from oil sands.
  • Canada is a net exporter of crude oil. Domestic oil is exported from the western provinces while the eastern provinces import international oil. In 2006, exports reached $38 billion and imports amounted to $23 billion.
  • Canada has an extensive network of pipelines carrying crude oil to domestic refineries. The three main refining centers in Canada are in Edmonton (Alberta), Sarnia (Ontario) and Montreal (Quebec).
  • Oil is the most important energy source used in Canada, ahead of natural gas and electricity. Over two-thirds of the refined petroleum products sold in Canada are used for transportation: gasoline, low-sulphur diesel and aviation fuel.
  • After a period of low and relatively stable prices during the 1990s, crude oil prices have risen in recent years in international markets. This has resulted in increased revenues for Canadian producers and higher prices for Canadian consumers.
  • In coming years, the Canadian oil sector will be dominated by the pace of oil sands development. New pipeline and refining capacity will also be required to accommodate supply and market requirements.

What is Oil?

Crude oil is a naturally occurring, flammable liquid found in rock formations in the Earth. It is a complex mixture of several hydrocarbons, which are compounds consisting of hydrogen and carbon. Crude oil may also include other organic compounds such as nitrogen, oxygen and sulphur. Crude oil may vary in appearance depending on its composition, but it is usually black or dark brown in colour.

The various hydrocarbons found in crude oil can be separated through distillation and can be used to produce different types of refined petroleum products. These products can be used as fuels because they can be combusted in the presence of oxygen. Like natural gas and coal, crude oil is labelled a fossil fuel because it is deemed to come from the transformation of plant and animal remains over millions of years.

Industry Structure

There are several segments in the crude-oil and petroleum industry in Canada:

  • the upstream oil and gas industry operates oil and gas properties through activities such as exploration, drilling, production and field processing;
  • a variety of firms provide support services to oil and gas extraction operations, on a contractual or fee basis, such as drilling and well maintenance;
  • petroleum refineries process crude oil into a number of refined petroleum products;
  • oil pipelines transport crude oil and petroleum products between production areas, refineries, export or import border points, and end-use markets;
  • a variety of firms distribute refined petroleum products at the wholesale and retail levels.

Each of these segments is composed of a large number of private sector firms, from multinationals to regionally based firms to small independent businesses. Some firms are vertically-integrated, having activities from exploration to retailing, while other firms specialize in very specific activities. Several associations exist to represent the interests of these industrial segments, including the Canadian Association of Petroleum Producers, the Canadian Petroleum Products Institute and the Small Explorers and Producers Association of Canada.

Regulatory authority over the production, transportation and distribution of crude oil and petroleum products within a province resides primarily with provincial governments. This authority is often exercised through provincial departments and regulatory agencies such as Alberta's Energy Resources Conservation Board. The federal government exercises its jurisdiction over the interprovincial and international movement of oil through the National Energy Board.


Canada has a substantial oil resource as its large landmass contains several areas with a favourable geology for petroleum resources. The most important area is the Western Canada Sedimentary Basin, a huge basin that extends from southwestern Manitoba to southern Saskatchewan, Alberta, northeastern British Columbia and the southwest corner of the Northwest Territories. Crude oil has also been found in many other areas, from the east coast offshore to the Arctic Ocean.

Canada's established reserves (proven oil reserves) are second only to those of Saudi Arabia. At the end of 2006, Canada's remaining established oil reserves amounted to 179 billion barrels. This is the volume of crude oil that can be recovered, using current technology under present economic conditions, from known reservoirs specifically proven by drilling, testing or production.

Canada's established reserves include 5.4 billion barrels of conventional oil reserves. Conventional oil, trapped in underground geological formations, is extracted by drilling and pumping. The bulk of these reserves is found in Alberta, Saskatchewan and the east coast offshore.

Most of Canada's established oil reserves - more than 95 per cent - is in the form of oil sands. The oil sands are a mixture of crude bitumen (a semi-solid form of crude oil), silica sand, clay minerals, and water. Several processes have been developed for separating the bitumen from the other elements, which can then be upgraded to synthetic crude oil. In Canada, the oil sands reserves are found primarily in Alberta. The oil sands deposits are in the Athabasca, Cold Lake and Peace River areas.

Canada's established reserves are sufficient to meet Canadian demand for the next 200 years at current production rates. Some oil discoveries have not yet been categorized as established reserves. The actual oil resource is believed to be much larger than the current established reserves. In fact, undiscovered conventional reserves are thought to exist based on geological information, but have yet to be found. The ultimate potential of Alberta oil sands is estimated at 315 billion barrels. This is much larger than the current established reserves of 173 billion barrels.

Exploration and Development

In order to produce crude oil, the upstream industry must first find reserves through exploration activities. Once reserves have been established, the industry then develops an infrastructure at the field level to extract and process the crude oil so that it can be transported by pipeline to refineries. Drilling is a key element of the exploration and development phase as it is used to find new reserves, gather information on known oil reservoirs, and extract crude oil.

Most Canadian petroleum companies are active in both crude oil and natural gas development. Capital investment in exploration and development has increased significantly in recent years. In the conventional sector, spending on exploration and development reached a record level in 2006. Capital investment in the conventional oil and gas industry has grown steadily from a range of about $5 billion to $10 billion annually in the early 1990s to $39 billion in 2006.

Most of these expenditures support increased drilling activities. Drilling for crude oil has increased, with the number of annual oil well completions reaching 4,500 to 6,000 in recent years, compared with a level of about 2,000 at the start of the 1990s.

There has also been significant growth in development activities in Canada's oil sands sector. In the oil sands, capital investment in exploration and development, which averaged less than $1 billion annually in the early 1990s, reached a record level of $14 billion in 2006. This increase in investment has supported significant growth in the oil sands as producers expand existing operations and construct new facilities.


Canada is currently the 5th largest oil producer in the world. Canada's crude oil production has risen fairly steadily over the past two decades. Annual crude oil production amounted to 609 million barrels in 1990 and reached 969 million barrels in 2006. While conventional sources continue to account for more than half of crude oil production, oil sands operations have been responsible for most of the growth in oil production in Canada in recent years.

Commercial oil sands operations began in 1967 with the opening of the first oil sands mine. In 1990, Canada's annual oil sands production amounted to 125 million barrels. Since then, its production has more than tripled, reaching 413 million barrels in 2006.

Most of Canada's crude oil comes from the western provinces, especially Alberta, which was responsible for about 69 percent of Canadian production in 2006. Production from the east coast offshore has increased in recent years, reaching 12 per cent of Canadian production in 2006.

Canadian Crude Oil Production
Larger image

Pipelines and Refineries

Pipelines provide the most reliable and efficient means of transporting large amounts of crude oil on land over long distances. There are over 12,000 kilometres of gathering lines, transporting crude oil from producers' fields to the trunk lines. There are about 23,000 kilometres of trunk lines transporting crude oil from the Western Canada Sedimentary Basin to Canadian refineries and international border crossing points, or carrying foreign crude oil from the United States east coast to Canadian refineries.

At the refineries, crude oil is separated into useful products through fractional distillation and other processes. A wide variety of refined petroleum products are possible, from gases such as propane and butane, to light- and medium-density products such as gasoline, diesel and heating oil, to heavier products such as lubricants and asphalt.

There are three main refining centers in Canada: Edmonton (Alberta), Sarnia (Ontario), and Montreal (Quebec). Individual refineries are also found in several other provinces. There are no refineries in Manitoba, Prince Edward Island or the Northwest Territories.

Refined petroleum products are transported to end-use markets by truck, railway, and over 5,000 kilometres of dedicated pipeline.

Exports and Imports

The Canadian oil industry works in a dual market. On the one hand, about two-thirds of domestic crude oil production is exported. The oil produced in the western provinces is used in refineries in Western Canada and is exported to the United States. On the other hand, crude oil imports satisfy about half of domestic refinery demand. Due to logistics and transportation costs, refineries in Quebec and the Atlantic provinces refine primarily imported oil. Refineries in Ontario use a mix of both imported and domestically produced oil.

Overall, Canada is a net exporter of crude oil given that exported volumes amount to more than twice the volume of imports. In 2006, Canada exported 646 million barrels of crude oil, valued at about $38 billion. Almost all of these exports were to the United States, especially the Midwest states that are close to the oil production facilities in Western Canada. Canada is the largest exporter of crude oil to the United States.

In 2006, Canada imported 310 million barrels of crude oil valued at $23 billion. The imports originated from a variety of countries including Norway and the United Kingdom.

Canada also exports and imports petroleum products refined from crude oil. For example, due to the high demand for petroleum products in the northeastern United States, refiners in Atlantic Canada export considerable volumes of petroleum products to that region. In 2006, Canada exported 25 billion litres of refined petroleum products and imported 17 billion litres.

Canadian Crude Oil Trade
Larger image

Domestic Consumptions

In terms of energy content, oil is the most important energy source for Canadian consumers, ahead of natural gas and electricity. In 2006, 41 per cent of Canada's final energy demand was met using refined petroleum products.

Sales of refined petroleum products in Canada totalled 100 billion litres in 2006. Product sales increased at a slow but steady pace during most of the 1990s and early 2000s, stimulated by economic and population growth.

Transportation consumes more than two-thirds of refined petroleum products, primarily motor gasoline, low-sulphur diesel fuel and aviation fuel. Increased demand for these products is largely responsible for the growth in total sales of refined petroleum products since 1990.

Other refined products sold in Canada are used for energy purposes (e.g., furnace oil, heavy fuel oil) and non-energy purposes (e.g., lubricants, asphalt). Annual sales can fluctuate as a result of factors such as temperature variations and fuel substitution. For example, furnace oil demand varies with the severity of winter weather, and gasoline sales increase in the summer months with the peak of the driving season. In the 1990s, the demand for furnace oil and heavy fuel oil declined as a result of the wider availability of natural gas.

Domestic Sales of Refined Petroleum Products
Larger image


The price of crude oil is established in the international market based on supply and demand considerations. In the 1990s, a relatively stable world oil market, with high production and weak oil demand, led to depressed prices. During the last few years, however, there has been a significant increase in world oil prices. For instance, the price of West Texas Intermediate crude oil, a market reference stream used for pricing other crude oil, reached a low of US$14 per barrel in 1998 but averaged over $66 in 2006.

Factors often cited as having contributed to recent price increases include renewed geopolitical concerns in the Middle East, lower spare oil capacity, production cuts by the Organization of the Petroleum Exporting Countries, the devaluation of the United States dollar against other major currencies, increased demand from emerging economies and significant growth in speculative trading in the oil futures market.

Canadian crude oil producers are "price takers," as the price obtained for their product is based on the price of market reference crude oils such as West Texas Intermediate oil. In recent years, Canadian producers have benefited from higher oil prices, which increased their revenues and provided the financial resources needed to support augmented levels of exploration and development. Expanded production capacity in Canada, along with increased imports from other oil bearing regions, are required to meet the future demand for oil.

Annual Average Crude Oil Prices-West Texas Intermediate (at Cushing, Oklahoma)
Larger image

Canadian refiners are also "price takers" and have very little influence on the price they pay for crude oil. Refineries buy crude oil at the world price, regardless of its source. In Canada, the cost of crude oil is by far the largest component of the price of refined products like gasoline. Higher international oil prices in recent years have led to higher costs for refineries, and they, in turn, have charged Canadian consumers higher prices for refined petroleum products such as motor gasoline.

Refining and marketing costs are also important elements of the price set by refineries for their products. Cost pressures are also felt from increasingly stringent fuel specifications and the need for capital spending to increase refining capacity in North America.

In the case of gasoline, in Canada, federal and provincial taxes are the second largest price component. Canadian gasoline taxes are higher than similar taxes levied in the United States, but are much lower than those levied by countries in the European Union. In Canada, gasoline taxes help to fund government priorities such as funding for transportation and community infrastructure.

As the downstream petroleum sector is highly competitive, prices paid by Canadian consumers may vary based on market conditions. Each petroleum product in each regional market reacts to a different set of supply-demand and transportation pressures, with a resulting variation in product prices.

Product prices may also react to short-term supply disruptions due to factors such as unscheduled outages at refineries and extreme weather events. These disruptions affect prices because Canada and the United States have limited surplus refining capacity.

Regular Gasoline Pump Price in Canada, by Components
Larger image


Over the next 15 years, Canadian crude oil production and exports are expected to continue to increase. The upstream oil industry will be dominated by the pace of oil sands development. Production from conventional sources is expected to decline while the output from the oil sands is projected to triple. By 2020, 80 per cent of production is forecast to come from the oil sands.

Canada's oil industry is expected to continue to be influenced by the interplay of international oil prices, environmental considerations, the pace of technology development, and the availability of investment flows.

Due to the rapid expansion of Canada's oil sands over the next decade, new pipeline infrastructure will have to be built to accommodate the increase in supply and market requirements. To meet future oil demand, there are pipeline projects currently under construction and a number of other pipeline projects have been proposed.

The refining capacity must be sufficient to meet a projected increase in North American demand for petroleum products. The limited refining capacity in North America has created a need for further investment. Because the demand for petroleum products is projected to increase, refinery capacity expansion will be required. In addition, ethanol fuel is expected to play an increasing role in the gasoline market as a result of government initiatives. The Government of Canada requires all gasoline to have 5 per cent ethanol content by 2010.