Sliding oil prices are generally bad for most companies in the oil and gas industry.

But one segment is loving the current conditions of low oil prices, surging supply, and motivated exporting.

It’s also being boosted by cheap natural gas, which it uses as a power source. I am, of course, talking about refineries – they’re in the midst of a major boom.

U.S. refineries are running at well above 90% of capacity. Refining capacity has reached approximately 17.8 million barrels a day, an increase of 400,000 barrels a day from just two years ago.

John Auers from the energy consultancy Turner, Mason & Company said to the Financial Times, “They’re running refineries as hard as they can.”

This war between certain producers has left two refining companies, in particular, sitting in the catbird seat.

Canada vs. Mexico and Venezuela

According to Bloomberg, the heavy oil producers in Canada, Mexico, and Venezuela are battling it out via oil prices.

The latter two countries have traditionally provided Gulf Coast refineries with heavy crude. But Canada, which increased its oil exports to the United States by 63% in the past five years, is now muscling its way in.

This month the new Seaway Pipeline – owned 50/50 by the Canadian Enterprise Product Partners L.P. (EPD) and the American Enbridge (ENB) – will nearly double the amount of heavy crude oil coming to Gulf Coast refineries to almost 400,000 barrels a day.

This heavy crude shipping through the pipeline from Canada will now cost roughly the same as heavy crude shipped via oil tankers from Mexico, thanks to discounts offered by Canadian producers.

In response, Mexico’s state-owned oil company, Pemex, is raising its discount to U.S. buyers to $3.70 a barrel from $0.90 in January. That is the biggest discount rise since August 2013!

But why is Mexico doing this?

Well you see, U.S. refiners can handle heavy crude, while most refiners elsewhere in the world cannot. On the Gulf Coast alone, there are 2.4 million barrels a day of heavy oil refining capacity.

So if Mexico and Venezuela can’t sell their oil here, much of their oil revenues will dry up. Brazil and Saudi Arabia are working on their own large heavy oil refineries, but they’re still several years away from being finished.

The Mexican Institute of Finance Executives said in an interview with El Economista, “Mexico will need to make adjustments to face this new situation (lower prices) in the oil market.”

These adjustments are greatly benefiting the American oil refiners.

The Two Main Beneficiaries

Two refining companies have spent heavily on the necessary equipment to refine heavy crude, making them poised and ready to process: Valero Energy (VLO), the largest U.S. refining company, and Marathon Petroleum (MPC).

Valero is particularly interesting, having increased its overall refining capacity by 277% between 2000 and 2013. The company also has the 57% of its refining capacity on the Gulf Coast, more than any of its competitors.

In September, Valero began operating a new rail offloading facility at its Port Arthur Refinery, which allows it to obtain cheap Canadian heavy crude without a pipeline. Its overall expansion is continuing, too, with the planned addition of refining units in Houston and Corpus Christi, Texas.

Marathon also has projects in the works to make it easier to get heavy crude from Canada to its refining facilities. 

It’s contemplating reversing the flow of the Calpine pipeline system – owned by MPC, BP (BP), and Plains All American Pipeline L.P.(PAA) – in 2016 from Louisiana to the Midwest, repurposing it to bring heavy oil from Alberta to its Gulf Coast refineries. 

Approximately 1.2 million barrels a day of Canadian crude could be shipped via this pipeline to the Gulf Coast.

In general, both companies continue to look at more ways to leverage the price war between Canada and Mexico. In the carnage that is the energy sector, these two companies stand to benefit greatly.

And “the chase” continues.