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Upgrading starts at home Alberta government invites proposals for bitumen-in-kind program to slow outflow of bitumen to U.S; strategy welcomed by some Gary Park For Petroleum News
Almost two years after unveiling the “framework” of its infamous new royalty regime, the Alberta government has delivered on one of its secondary proposals, which involves taking raw bitumen in kind rather than cash royalties to keep more of the value-added benefits of the resource at home.
It has issued a Request for Proposals that closes on Dec. 2 and expects to decide by early 2010 which upgrader will receive an initial 75,000 barrels per day, mostly from in-situ oil sands producers.
If the scheme is successful, the royalty-in-kind volumes could rise to 300,000 bpd.
Finance Minister Iris Evans said the plan is a “strategic tool that fosters value-added development in Alberta” by diversifying the province’s energy economy, keeping jobs in Alberta and generating larger total energy revenues for Albertans.
Energy Minister Mel Knight said capturing more of the oil sands resource potential “is the cornerstone of a flourishing value-added energy industry that includes upgrading, refining and petrochemicals. This initiative will further our goal of establishing Alberta as a world-class energy center.”
Premier Ed Stelmach set the ball rolling in 2006 by pledging to process more bitumen in the province rather than shipping the raw product to upgraders and refineries in the United States, comparing the export of bitumen to scraping the topsoil off farmland.
The government is now waiting for industry reaction to the RFP and “whether or not companies are interested in playing,” said a government spokesman.
Alberta has lost ground While the drafting of a plan has been under way, Alberta has lost some ground, as oil sands producers EnCana and Husky Energy have formed joint ventures with ConocoPhillips and BP, respectively, to share production in return for gaining access to U.S. refineries.
The government has set an initial goal of refining 66 percent of its bitumen into synthetic crude and petrochemicals, up from today’s 60 percent, in the same way that it already takes a share of conventional crude in barrels rather than cash.
Knight was unable to estimate how much additional revenue or new jobs the plan might produce, but said the parallel conventional crude program has been a “valuable piece of business.”
He is not concerned about the impact on new pipelines under construction or planned from the oil sands to the U.S., and eventually the Gulf Coast.
“A pipeline can just as easily manage synthetic oil,” Knight said. “These opportunities with pipelines become very crucial and critical for us because we have to be able to reach our market. I’m not concerned.”
It will take until 2010 and 2011 to develop regulations and enact the policy, opening the way for a government agency to start accepting bitumen deliveries in January 2012.
Merchant upgraders approve Despite the absence of those details, there was an enthusiastic response, notably from developers of two proposed merchant upgraders, which have been stalled because of financing problems, as well as from the petrochemical sector.
Ian MacGregor, chairman of North West Upgrading, which has deferred plans for a 213,000 bpd upgrader, said the prospect of guaranteed security of supply could revive those plans.
“Firms will have to provide a cost competitive proposal to the province and we think we can do that,” he said.
If it can obtain a long-term contract, North West could negotiate financing and start construction in spring 2010 on its first phase, estimated two years ago to cost C$4.2 billion for a 77,000 bpd facility. The startup company has so far raised C$400 million and hopes to bring the upgrader on stream in early 2013.
North West already has a contract with Canadian Natural Resources for 25,000 bpd of heavy oil and hopes the government scheme could secure the balance of the feedstock.
Value project also on hold
The global financial slump brought a halt to work on a second upgrader by Value Creation, whose subsidiary BA Energy sought creditor protection after defaulting on a C$50 million loan from its parent company.
Value Chairman Columba Yeung has indicated the company hopes to arrange new financing and resume work on the project before the end of 2009.
It is also negotiating with both upstream and downstream companies on a possible partnership.
While Value hopes its own oil sands production from its Terre de Grace leases can cover some of the feedstock needs, it would like the chance to share in some of Alberta’s royalty bitumen.
Richard Paton, president of the Canadian Chemical Producers’ Association, credited the government with delivering new hope to an industry that does annual business in Alberta worth C$13.3 billion.
A firm commitment to upgrade bitumen in Canada is a step closer to a “sufficient series of projects that will represent world-scale feedstock opportunities for our industry,” he said.
The Canadian Association of Petroleum Producers has some reservations about the proposal, noting that guaranteed feedstock can be made available through the “ample” supplies that are already available for purchase.
CAPP Vice President Greg Stringham told the Calgary Herald: “The question is, would you prefer to buy it from the market or is there some reason you’d want to buy from the government’s royalty barrels. At this point in time, it’s not quite clear, so that’s why we need to see the rest of the details of the RFP.”
Chris Feltin, an analyst with Tristone Capital, said the key beneficiaries of the plan could be companies such as North West, whose projects have been put on hold and now face further uncertainty as work advances on building incremental pipeline capacity to the U.S.
Other stalled projects In addition to North West and BA Energy, 10 upgraders have been stalled, including Petro-Canada’s plans for a 55,000 bpd plant at its deferred Fort Hills project and Total Canada’s 100,000 bpd Northern Lights facility.
Although it is not yet clear, the proposal to exclude “integrated” oil sands operations — those that produce and refine bitumen — could rule out Husky, EnCana, Royal Dutch Shell and Suncor Energy from participating. But those companies said it is too early in the process to comment.
Gil McGowan, president of the Alberta Federation of Labor, one of the strongest voices for “aggressive” restrictions on exports, said the new “super” pipelines to the U.S. have eroded the cost advantage of cheaper feedstocks that would have kept more processing within Alberta.
He said exports “sound like a good thing because producers get a higher price for their product, but, in reality, it’s a bad thing for Alberta because it removes the competitive advantage for Alberta-based upgraders and refineries.”
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