II Background on the Oil Business:
Canada and New Brunswick
A. Crude Oil Production
Crude oil is the term used to describe oil in its natural state as it
is pumped from sea or land based wells. Crude oil is traded in barrel quantities.
One barrel equals 159 litres. The majority of Canadian crude oil production
or oil industry "upstream" activity occurs in western Canada.
The Cohasset - Panuke field off the coast of Nova Scotia produces 20,000
to 25,000 barrels of crude per day, most of which is shipped to markets
in the United States. The Hibernia and Terra Nova fields under development
off the Coast of Newfoundland are expected to produce 200,000 barrels per
Oil producers generally pay royalties to the jurisdiction in which wells
are located, to compensate for the depletion of a non-renewable resource.
In Canada, these royalties are collected by the provinces.
Crude oil varies in composition depending on its source. The main variables
are sulphur content and density. Crude is priced at a particular location
with reference to its source which serves as an indicator of type or grade.
West Texas Intermediate, North Sea Brent and Saudi Arabia light are similar
crudes and are used as the benchmark crudes for pricing other types of
light crude oil. An example of a benchmark price would be "West Texas
Intermediate at Chicago."
The price of crude oil is determined by world market forces based on
supply and demand. Refineries can contract with producers for long term
supply arrangements at fixed prices or purchase on the "spot market"
and take immediate delivery. Thus at any point in time, refineries in the
same market area could be paying different prices for crude as a result
of different supply contracts.
B. Refinery Operations
There are 21 refineries in Canada producing a full range of oil products.
The table below presents Statistics Canada data regarding the major product
categories, the principal use for each type of product and the portion
of demand for crude oil that each category represents:
- motor gasoline - for cars and light trucks 42%
- diesel fuel - for highway trucks or trains 22%
- heavy fuel oil - for large institutional/industrial heating 7%
- aviation fuel - for aircraft 6%
- light fuel oil - for home heating 6%
- other products - such as lubricating oils, greases, asphalt 17%
and petrochemical feedstocks
Atlantic refineries are typically set-up to handle light grades of crude.
Refineries can alter their operations to process crude oils of different
compositions within bounds, as well as different product mixes. For example,
in the winter, refineries produce less motor gasoline and more light fuel
oil for home heating.
Canadian refineries vary in capacity from 3,600 to 237,500 barrels per
day. Most refineries are owned by integrated oil companies that have their
own producing wells. Some, including two of the three refineries serving
New Brunswick, are owned by companies that only have "downstream"
operations: marketing and distribution networks including retail outlets.
Most of Canada's refiners have reciprocal exchange agreements in place.
Under these arrangements, companies such as Shell or Petro-Canada that
have no refining capacity in Atlantic Canada may trade product on a litre
for litre basis with, for example, Imperial Oil which does have an Atlantic
refinery. In exchange for supplying product in Atlantic Canada, Imperial
Oil would have access to an equivalent volume of product in some other
region where it does not have a refinery.
Crude oil is transported from production fields to refineries by pipeline
or marine tanker. Atlantic Canadian refineries purchase the majority of
their requirements on the world market and are thus serviced by marine
tankers. This is easier logistically than transporting oil from western
Refiners sell to retail gasoline dealers and other oil product distributors
either directly from storage tanks at their refinery or through distribution
terminals. Refined oil products like gasoline are typically transported
to distribution terminals by either marine tanker or pipelines. In Atlantic
Canada, all terminals are serviced by marine tanker. Highway truck tankers
then transport gasoline from the terminal or refinery truck loading facilities
(referred to as "racks") to underground storage tanks at each
C. Retail Sector
Oil refiners make their product available to consumers through a variety
of distributors and retail formats. Retail outlets vary in terms of:
- ownership - outlets may be owned by integrated oil companies,
refiners, independent business people or chain retailers.
- operation - outlets can be operated by their owner, by staff
directly employed by the owner, or leased to an operator.
- selling arrangement for gasoline - some retailers purchase and
resell gasoline and as such have input into the retail price. Some outlets,
even those which are independently owned, sell gasoline on a commission
basis and their supplier owns the gasoline until it is pumped into the
consumer's vehicle. Where these arrangements are in place, the retailer
is not involved in the price setting process. During a price war, suppliers
may switch "buy sell" retailers to a commission system in order
that they and not the retailer bear the cost of the price war. Unless the
prevalence of commission arrangements is known, it is difficult to determine
the extent to which suppliers are involved in the price setting process.
- use of brand - the majority of retailers operate under the brand
of the integrated oil company or refiner that arranges for them to be supplied.
Some independents operate under their own name or the name of the wholesaler
that supplies them.
- ancillary services offered and degree of dependence on gasoline
sales - a majority of outlets now generate substantial revenue from
other lines of business such as a convenience store, restaurant, car wash
or traditional service bays.
D. The Structure of the New Brunswick Motor Fuel Industry
New Brunswick has approximately 683 retail gasoline outlets. The average
throughput for New Brunswick outlets is estimated to be 1.36 million litres
annually compared to a Canadian average of approximately 2 million litres.
Exhibit 2 provides an estimated breakdown of retail outlets by brand and
county. Over 60 percent of outlets operate under Irving or Imperial Oil
brands. Less than 10% of outlets are classified as independents. Independent
outlets are those which are not owned by an oil refiner or oil producer
and also do not operate under the brand of an oil refiner or producer.
New Brunswick has the second lowest percentage of such independent outlets
in Canada. Exhibit 3 compares the relative share of outlets operated on
an independent basis across the 10 provinces. The data in Exhibit 3 is
from Octane magazine and should be used only to show trends.
Two refineries provide the majority of supply for the Province. The
Irving refinery in Saint John services only Irving outlets. The majority
of the other outlets, regardless of brand are supplied from the Imperial
Oil refinery in Dartmouth. The Irving refinery is the largest in Canada
with a capacity of 237,500 barrels of crude per day. The Imperial Oil refinery
with a capacity of 82,200 barrels of crude per day is similar in size to
the Canadian average. These refineries are able to access crude at prices
comparable to the rest of Canada.
No outlet in New Brunswick is very far from a wholesale terminal. There
are "racks" (distribution terminals) in Saint John (Imperial
Oil), Chatham (Ultramar) and Belledune (Shell) which generally serve all
major brands other than Irving. The northwest corner of the Province receives
some supply from the Ultramar refinery in St. Romuld Quebec. The transportation
cost from Dartmouth to most outlets in New Brunswick including the cost
of marine transport to the noted distribution terminals, is between 1¢
and 2¢ per litre. Transportation costs for outlets serviced by the
Saint John refinery are generally less. Truck transport costs are estimated
to be between .4¢ and .5¢ per litre per 100 kilometres.
Exhibit 4 provides definitions of the key types of players in the New
Brunswick gasoline business. In this report, the term refiner marketer
is used to refer to both the integrated oil companies that have production,
refining and marketing operations as well as those that only have refining
and marketing operations.
Exhibit 2 - BREAKDOWN OF RETAIL OUTLETS IN NEW BRUNSWICK
Exhibit 3 Distribution of Outlets by Province
Gasoline Industry Players and Definitions
Integrated Oil Companies
These are typically large multi-national firms that:
- produce crude oil from their own wells;
- refine the crude into a variety of products including gasoline.
- operate distribution terminals or "racks"which are typically
a set of large bulk tanks referred to as a "tank farm" located
on a marine terminal where waterborne tankers can unload.
- market gasoline both through outlets they own and outlets owned by
other firms or individuals. The outlets owned by the integrated oil companies
generally operate under that company's brand. Independent outlets may operate
under one of the major brands or under an independent brand.
The integrated oil companies active in New Brunswick are Imperial Oil,
Shell and Petro-Canada. Metro is a brand owned by Imperial Oil.
Refiner Marketers/Regional Refiners
These companies differ from the integrated oil companies only in that
they do not have oil production operations. These firms purchase crude
oil on the world market for their refining operations. The refiner marketers
active in New Brunswick are Ultramar and Irving Oil. XL and Turbo are brands
owned by Ultramar.
These are independently owned gasoline marketers that own one or more
outlets and purchase gasoline from a refiner marketer or an integrated
oil company.These outlets operate under the brand of the refiner marketer
or integrated oil company that supplies them. These outlets generally have
multi-year agreements with their supplier in which they agree to buy only
from that supplier. The supplier often invests in signage, equipment or
facility improvements in exchange for the long term purchasing commitment.
These are independently owned gasoline marketers that own or supply
one or more outlets and purchase gasoline from a refiner marketer or an
integrated oil company. Neither they nor their customers operate under
the brand of a refiner marketer or an integrated oil company. Co-op,Canadian
Tire, Wilson, Greg's and Daly's are examples of unbranded independents.
In this report, the term refiner marketer is used to refer to both refiner
marketers and the integrated oil companies. Where the term independent
is used, the reference is to unbranded independents.