|
Upgrading begins at home Legislation introduced to take oil sands bitumen in kind rather than cash, providing a catalyst for new ‘value-added’ upgrader projects Gary Park For Petroleum News
For the Alberta government, it is no longer a case of wistfully counting the jobs and revenues being lost as oil sands production enters the United States for upgrading and refining.
Premier Ed Stelmach once said the exports were akin to watching Alberta’s topsoil being skimmed off and sent elsewhere — a situation he said was tantamount to “thinking we have a rich farm because we have cash in the bank.”
To optimize oil sands development and ensure full economic value for all Albertans, the government has taken the next step in an effort to expand its role “along the value chain through upgrading and refining bitumen.”
It has targeted an “ultimate portfolio mix” of one one-third bitumen sales, one-third synthetic crude oil sales and one-third sales of finished products and petrochemicals.
An essential lever in that plan involves using “bitumen royalty-in-kind transactions to facilitate and expand an Alberta bitumen market,” including the establishment of a government-led organization to manage royalty-in-kind volumes and develop “value-added oil sands products.”
Since last summer, the government has heard from companies interested in processing bitumen in Alberta.
But since then, as well, the whole upgrading and refining sector — globally and not least in Alberta — has been thrown into turmoil.
Seven projects dead ended Already reeling from inflationary construction costs and the plunge in crude prices, proponents of seven projects in what is known as Upgrader Alley north of Edmonton have found themselves in a dead end.
Plans carrying an estimated price tag of C$90 billion have been cancelled or stalled, choked off by the financial liquidity crisis and scared off by concerns about looming environmental measures emanating from the U.S. administration of President Barack Obama.
Hopes of jobs for 22,000 construction workers in Upgrader Alley by 2012 and 12,000 full-time jobs have been dashed.
The only upgrader that has survived is an expansion of Shell Canada’s Scotford refinery complex to handle increased volumes from its Athabasca operation.
Bitumen royalties in-kind Against such daunting odds, the Alberta government maintains a cheerful exterior.
Finance Minister Iris Evans said “we’re optimistic” the shelved projects will be revived.
To bolster that view, the government has introduced legislation to collect bitumen royalties in-kind and use those supplies to feed at least one new upgrader, which would become the catalyst for pooling the use of resources such as water, steam and electricity and triggering the provision of infrastructure.
By extension, the government believes such critical mass would also lower per-barrel construction and operating costs.
In unveiling its plans for making several amendments to energy legislation as part of taking royalties in-kind, the government said it has had about 20 expressions of interest from the industry — enough to support a formal request for proposals, likely this summer.
To entice more industry backing, the government has also indicated it may not take the full equivalent of cash royalties, which have changed under Alberta’s new royalty regime that took effect Jan. 1.
Under the old system, producers paid 1 percent of their gross revenues before capital project costs were recovered and 25 percent, less operating and other costs, once payout had been achieved.
The new royalties start at about 5 percent before payout and 33 percent after that point.
Some upgraders enthusiastic Initially, the Canadian Association of Petroleum Producers has taken a measured approach, declining to comment without seeing the expressions of interest.
But there was plenty of enthusiasm from backers of merchant upgraders, such as North West Upgrading, which has sidetracked plans for a possible 231,000-barrel-per-day upgrader to ride out the economic storm.
When the government first invited submissions, North West President Robert Pierce said the strategy would help lock down his company’s supply needs and add “substantial value” to government royalties.
Joseph Doucet, a professor of energy policy at the University of Alberta, said the economies of scale make a significant contribution to lowering costs.
Kvisle argues for pipelines Hal Kvisle, chief executive officer of TransCanada, which is in the midst of building its Keystone pipeline from the oil sands to St. Louis and the Cushing hub in Oklahoma, where a second line is planned for the Gulf Coast refineries, argued earlier in March that those who claim sending raw bitumen to the U.S. will kill upgrader projects are “clearly misguided.”
“What these people are really worried about is that their upgrader projects won’t make sense and they want to create impediments to somehow improve the economics of their projects,” he said.
“But if they have good upgrader projects and if it makes sense to upgrade the crude in Alberta and if you can get tradesmen and contractors to build these upgraders at a reasonable cost, they will absolutely get built.”
That aside, Kvisle said that long-term shipping contracts signed by TransCanada with producers do not automatically mean that raw bitumen alone will be delivered to U.S. markets.
He said the existing 18-year contracts covering raw bitumen for Keystone can easily be converted moving upgraded crude.
“The pipeline we’re building is initially designed to move diluted bitumen,” he said. “In the event the Alberta upgrading industry really takes off, we’re more than happy to move upgraded crude. It’s less viscous and we can pump more barrels a day of upgraded crude than bitumen.”
Regardless of that debate, Kvisle said the order of priorities for Alberta is to increase bitumen production, then build pipelines and, finally, build upgraders, either now or in five years.
The upgrader argument In a letter to the Edmonton Journal, Jim Sheasgreen, chairman of the Alberta Heartland Industrial Association — a coalition of municipalities trying to facilitate the expansion of Upgrader Alley — said Kvisle’s dismissal of critics as “clearly misguided” ignores the “basic business arrangements and investment decisions that will be made.”
“A refinery or other operation in the U.S. that wants to accept raw bitumen must make significant capital investments to process this very heavy crude.
“To justify these investments, they will require long-term contracts that guarantee a long-term supply of raw bitumen.
“So, once these deals are made, the opportunity to upgrade in Alberta will be lost forever.”
Sheasgreen said Kvisle’s priorities are not aligned with the vision and priorities of Alberta, which must seize the opportunity to “diversify our economy and create a new and high-tech economy for future generations by moving our resources up the value chain.”
| 