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Vol. 11, No. 31 Week of July 30, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

A little bit helps

Giant step for North West Upgrading one more small step to ease refining bottleneck

Gary Park

For Petroleum News

The drive to increase bitumen upgrading in Alberta made another breakthrough with the signing of a supply agreement between producer Canadian Natural Resources and private start-up North West Upgrading.

Under the deal, Canadian Natural will supply 25,000 barrels per day of Cold Lake Blend heavy crude over five years to the C$2.4 billion North West plant that is due on stream near Edmonton in 2010 with initial capacity of 50,000 bpd, with tentative plans for two more phases of 50,000 bpd each if the venture succeeds.

Canadian Natural also has an option to hike the agreement by 20,000 bpd once the expansion receives final take off.

For the industry, it’s a case of every little bit helps as refiners run out of ability to handle any more Canadian crude — not just the slate of oil sands volumes but conventional crude as well — without undertaking plant conversions and additions. That in turn forces producers to reconsider the pace of their plans to increase supplies.

North West aims to become major processor

North West Chief Executive Officer Robert Pearce said the Canadian Natural deal is “a gesture of support for upgrading within Alberta,” adding another notch to the provincial government’s declared ambition of reaping more of the rewards from the value-added end of oil sands production.

He said North West’s objective is to become a “major processor of increasing supplies of bitumen and will support North America’s growing demand for light sweet products.”

“For us it’s an important step in that it says we are on our way,” Pearce said.

The company recently raised C$175 million through a private placement and expects to raise funds in the public markets prior to a construction start late in 2007.

Canadian Natural gains new outlet

Canadian Natural Senior Vice President Real Cusson said the contract gives his company a new outlet for a port of its heavy oil production and reduces the need for condensate to aid the shipment of bitumen to more distant upgraders.

Canadian Natural is still committed to building its own upgrader to handle production from the Wolf Lake/Primrose operation that is being designed to produce 120,000 bpd by 2009, in addition to an upgrader that is in the works for its Horizon mega-project.

The first phase of the Horizon upgrader, costing about C$2.5 billion, is planned to handle 110,000 bpd of synthetic crude in 2008. A second phase expansion will add about 45,000 bpd in 2010, followed by 77,000 bpd in 2012, although Canadian Natural is evaluating the merits of combining those two stages.

Fourth and fifth phases could boost the total from 232,000 bpd to 500,000 bpd by 2017.

North West’s application is currently before the Alberta Energy and Utilities Board and expected to obtain approval by mid-2007.

It aims to have total processing capacity of 231,000 bpd of blended feedstock by 2015, with crude bitumen accounting for 150,000 bpd.

The pact is another step forward in the challenging task of doubling bitumen processing in Alberta to double to 1.43 million bpd over the next four years.

For upgrader proponents, the good news is that they are largely managing to stay close to budget at a time when oil sands mining projects are exceeding forecasts by billions of dollars because of the cost of labor, materials and equipment.

BA Energy upgrader under construction

A second private merchant upgrader, BA Energy, has already entered the field by starting construction of its C$900 million stand-alone Heartland upgrader, also near Edmonton.

It received a regulatory green light in 2005, expects its initial phase to start processing 77,500 bpd of bitumen blend in early 2008 and has two more stages of 77,000 bpd each in the line up, yielding refinery-ready sour light crude.

The two merchant projects are part of a slate of upgraders in the works for northern Alberta that could involve capital spending of more than C$50 billion (and uncalculated additional spending if tentatively planned expansions proceed), although the labor shortage has caused misgivings among companies such as Husky Energy and Imperial Oil.

Upgraders have been described as the heavy lifters of the oil sands world. They turn the tar-like bitumen into lighter crudes that more conventional refineries can use to produce gasoline, diesel fuel, lube oils and asphalt.

Upgraders in the works

The list includes:

• An upgrader at the Nexen-OPTI Canada venture at Long Lake, which is about half completed and targeted to turn out 59,000 bpd of primarily 39-degree API sweet crude within a year.

The partners also have regulatory clearance to add 60,000 bpd of capacity in 2010-2011.

Like Canadian Natural, the joint venture appears to have its costs under control, having committed 75 percent of the budget, limiting the chances of a major cost overrun.

• Total E&P Canada, the Canadian subsidiary of the French oil giant, has declared its intention to build an upgrader to handle output from the Joslyn and Surmont oil sands operations and expects to launch a 200,000 bpd plant by 2015.

• Petro-Canada has the green light for a 190,000 bpd upgrader to support its Fort Hills project, although its Fort Hills partners, UTS Energy and Teck Cominco, think something in the range of 100,000-170,000 bpd is more likely by the first phase start up in 2011.

Later additions by about 2015 could push the total towards 400,000 bpd.

• Recently emerged North American Oil Sands has set its sights on a 70,000 bpd upgrader, scheduled to debut in 2014, although an application has yet to be filed with regulators pending a final decision on a location.

• Oil sands power Suncor Energy is pushing ahead with plans to grow its upgrading capacity from 260,000 bpd to 350,000 bpd in 2008 and has filed for a third upgrader to achieve 500,000-550,000 bpd in the 2010-2012 period.

• Shell Canada and its Athabasca partners, Chevron Canada and Western Oil Sands, is on track to introduce its first addition later this year as it doubles output to 300,000 bpd by late 2009.

• Syncrude Canada, the other oil sands pioneer, will grow its capacity by 110,000 bpd to 350,000 bpd later this year despite being slowed by odor problem emanating from the site in May.

• Despite indications that severe labor shortages could put a crimp in its plans to build an upgrader tied to its Sunrise oil sands project which is scheduled to come on stream in 2010-2012 and recover 3.2 billion barrels of bitumen, Husky Energy has not been diverted from almost doubling output at its established Lloydminster upgrader to 150,000 bpd. Front-end engineering is under way and if a final go-ahead is received construction of the Lloydminster addition will take up to four years to build.

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Scattering some of the oil sands gloom

Imperial Oil-ExxonMobil Canada, a Shell Canada-led partnership and Husky Energy are pushing ahead with various aspects of large-scale oil sands projects, taking the high road during a time of accumulating negatives.

The joint effort by the ExxonMobil sister companies involves the 300,000 barrel per day Kearl project that carries an initial cost projections of C$4.5 to C$6.5 billion to recover 4.41 billion barrels of bitumen over 50 years, is ready to enter the regulatory approval stream.

Similarly, Albian Sands Energy — a joint venture by Shell Canada, Chevron Canada and Western Oil Sands — has a regulatory date as it asks for changes to existing approvals to expand its existing Muskeg River mine.

Canada’s Environment Minister Rona Ambrose and Neil McCrank, chairman of the Alberta Energy and Utilities Board, have formed a three-member joint panel to review the two proposals.

They will examine the environmental impacts, decide whether the projects are in the public interest and receive public comments.

Kearl Lake could start construction in 2007

Assuming timely approvals and positive results from project engineering and design work, along with favorable business and market conditions, Kearl Lake construction could start in 2007, resulting in first production in 2010, with two more trains coming on stream in 2012 and 2018.

Although the Albian partners have waved a yellow flag by ordering internal and external project reviews, indicating estimates could soar 50 percent from the initial forecast as they target an expansion by 100,000 bpd to 270,000 bpd, are not ready to bow out of the regulatory process.

Despite any budget misgivings about expansion of the Muskeg River mine, operator Shell Canada said it has taken into account the need for a measured approach in expanding the venture.

That includes a decision to award a contract to ATCO Structures to construct a permanent camp at the site to accommodate 800 people in the first-phase expansion and grow to 2,500.

The partners are also continuing front-end engineering work, reinforcing its hopes that initial oil from the expansion will come on stream as scheduled in 2010.

Husky is contemplating taking a fresh route by building its own rigs for the Sunrise project as one way to get a grip on costs.

It will take Husky another 12 to 15 months to work on the details to effectively become its own drilling contractor for the 200,000 bpd thermal in-situ development.

—Gary Park