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Top priority, little hope Push by Canada’s socialist politicians to revive upgraders, refineries for value-added processing deemed uneconomic by industry GARY PARK For Petroleum News
If Canadian voters opt for a second electoral upheaval of 2015 and follow Alberta’s stunning lead by handing power to the socialist New Democratic Party one thing is certain for the petroleum industry.
All bets are off.
The already fading hopes for domestic and export pipelines to deliver oil sands bitumen to markets in North America, Asia and Europe would likely be even shakier.
But, in what would be an about face for political parties that are invariably at cross-purposes with the oil and natural gas sector, the two NDP administrations could find themselves tackling one of the costliest, most intimidating challenges within the industry.
Push for upgraders, refineries Both the Alberta and the federal NDP are certain they can extract better value from Canada’s natural resources and create jobs by rewarding those who establish upgraders (to convert raw bitumen into synthetic crude for refining into fuels) and conventional refineries.
Alberta Premier Rachel Notley is committed to developing a royalty structure that would keep more of the upgrading and refining operations in Alberta.
She said the 44-year Conservative party rule in Alberta had “squandered our wealth with a fire sale of our resources. We’ll stop the fire sale and start rewarding businesses that create upgrading and refining jobs here at home.”
The new Alberta government insists that the province’s “current royalty regime rewards extraction, rather than promoting value-added processing.”
It said a report commissioned by the Alberta Energy Department has concluded that upgrading bitumen in Alberta “results in approximately four times the value per barrel of bitumen processed.”
The government said that reviving four of the upgraders that were scrapped in 2008 would have helped create 4,000 permanent operations jobs and an additional 12,000 service, supply and maintenance jobs, while generating C$400 million a year in provincial corporate tax revenues.
It argues that the drop in oil prices has lowered construction costs, while increasing the potential for greater profits from refined products.
The federal NDP under Thomas Mulcair, having pledged to change Canada’s energy landscape, has given priority to working with provincial governments to “upgrade and refine our raw resources here in Canada.”
Obvious levers The obvious levers at the disposal of an NDP administration would be: 1) preferential tax treatment, even though Mulcair has insisted he will remove C$240 million a year in subsidies from the industry; 2) placing limits on exports of bitumen, which would put the government on a collision course with the North American Free Trade Agreement; and 3) direct government involvement in the refining sector.
Mulcair has hinted he wants to apply the model which has allowed Norway to “leverage its resources to create value-added jobs,” although that country is still only processing 300,000 barrels per day of the 1.8 million bpd of crude it produces, while Canada refines a far higher percentage of its production - 1.9 million bpd of 3 million bpd (with 1.2 million bpd of unprocessed bitumen currently being shipped to the United States).
Issue of industry support What neither branch of the NDP - Alberta or federal - has explained is how it hopes to gain industry support to reverse a pullback from refining that has stretched over more than 30 years.
A North West Upgrading facility near Edmonton is scheduled to start operations in two years, making it the first new refinery in Canada since 1984, while a North Dakota refinery that opened earlier this year was the first to be built in the U.S. since 1976 - reflecting the reluctance by companies to make massive investments in a volatile sector.
Playing in the big leagues is not for the faint of heart, as oil sands giant Suncor Energy and its French partner Total discovered two years ago.
They finally took the unprecedented, but not unexpected step of abandoning their C$11.6 billion Voyageur upgrader after spending C$3.5 billion on the initial construction phases, after deciding that the venture did not make economic sense and getting caught off-balance by a dramatic shift in the North American crude market.
The upgrader, designed to process 200,000 bpd of bitumen, had long been presented as a key plank in Suncor’s plan to raise its production by 120 percent from 2004 to 550,000 bpd in 2016.
Mike Dunn, director, institutional research, with FirstEnergy Capital, said the decision was inevitable “because these projects don’t make money.”
North West has government support Backstopped by the Alberta government, North West has been able to battle through headwinds, despite swallowing the usual dose of cost overruns which have raised its price tag by 50 percent to C$8.5 billion and despite a delay of one year in its planned startup of commercial operations.
North West Chief Executive Officer Ian MacGregor has consistently argued that if Alberta wants to build schools and hospitals and infrastructure and stem the flow of taxes, jobs and economic activity to the United States it needs an expanded refining business.
Judith Dwarkin, chief energy economist at ITG Investment Research, refuses to accept the idea that spending billions of dollars to increase refining capacity in Canada will be an economic benefit, noting that the Alberta government has been forced to supply 37,500 bpd of its own marketable bitumen and pay fees for processing to keep North West alive.
She argued that rather than being a commercially based venture, the upgrader has required an infusion of public funds.
Ted Morton, a former Alberta finance minister and now a senior fellow at the University of Calgary School of Public Policy, has described North West as a “boondoggle with high risks for Alberta taxpayers,” costing them C$26 billion.
Refineries proposed for BC coast With other proposed upgraders and refineries for Alberta now on the shelf, the only slender hope for advancing where Alberta has faltered rests with three refineries that have been proposed for the British Columbia coast, mostly tied to the wavering chances of accessing Asian markets with oil sands production.
Two of them - Pacific Future Energy and Kitimat Clean - require pipelines from Alberta (with Pacific Future also exploring the possibility of moving the crude by rail) to the plants on the British Columbia coast, where the bitumen would be converted into refined products that the proponents claim would be more acceptable than loading tankers with raw bitumen.
The third scheme, Eagle Spirit Energy, would refine bitumen in either Alberta or northeastern British Columbia before piping the products to the Pacific Coast for export.
Among the obstacles to be overcome - securing financial backers and Asian customers, gaining support from First Nations and environmentalists and obtaining regulatory approval - there has been no enthusiasm in Asia for giving preference to Canadian refineries.
Ultimate barrier economics Ian Anderson, president of Kinder Morgan Canada, which plans to triple capacity on its Trans Mountain pipeline from the oil sands to the Pacific Coast, also points to the ultimate barrier.
“If it were economic to have a new refinery, I assure you there would be one,” he said.
Almost from the initial announcement, the proposed C$25 billion, 550,000 bpd Kitimat facility was scorned, with Michael Ervin, principal of MJ Ervin & Associates, suggesting the chances of moving to the construction phase were almost nil.
“It makes no sense to build a refinery of that size on the West Coast, especially when you consider that China is adding refineries that will be able to process 3 million bpd of crude (by 2018),” he said.
Ervin said the price differential between the price of crude and the petroleum products extracted from it will never work, even before capital and operating costs were included.
Even if opponents succeeding in scuttling Enbridge’s Northern Gateway pipeline plans to export 525,000 bpd through Kitimat, he said there are enough other options to move crude bitumen to market to render plans for new refineries in Canada suspect.
And that assessment could be the eventual downfall for any NDP governments that attempt to use the public purse to entice industrial partners to take a path that others have long since rejected.
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