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Refining the BC-Alberta showdown
BC Premier John Horgan promotes domestic oil sands upgrading; Alberta offers guarantees, royalty credit; Asian buyers not onboard Gary Park for Petroleum News
Amidst the quarreling and legal battles that accompany efforts to move oil sands crude across Canada, the one solution that frequently surfaces is the construction of more refineries to reduce the toxic volumes of bitumen that are carried in pipelines.
Even British Columbia Premier John Horgan has emerged as an advocate of investing in facilities to process the raw bitumen in Alberta rather than running the risk of spills from pipelines, rail and shipping tankers off the Pacific Coast.
He argues that the Canadian and Alberta governments would be better off investing billions in refineries “so that Canadians can benefit from jobs and from this natural resource rather than sending it to another jurisdiction.”
That’s a complete about-turn by Horgan from five years ago when British Columbia entrepreneur David Black was touting a proposal to refine about 1 million barrels per day of Alberta bitumen at a facility near Kitimat on the northern B.C. coast, with the resulting fuels being exported to the Pacific Rim.
At the time, Horgan said British Columbia was a “good distance away from (Black’s scheme) being relevant. There’s not a lot of resource analysis to say it’s a winner.”
Since then, he’s sounded more open to a refinery, saying he “would be absolutely delighted to participate with both (Canada and Alberta) to find a way to take the oil sands resources and use them in the interests of Canadians.”
Notley opposed But Alberta Premier Rachel Notley was quick to present some of the arguments against domestic refining, noting that the Asia-Pacific market is more interested in taking control of the value-added end of processing bitumen.
In fact, dating back more than 10 years, Chinese partners in Enbridge’s Northern Gateway pipeline plan to export 525,000 bpd were emphatic that they were not interested in buying refined crude.
New, full-blown refineries now get built closer to regions where gasoline and other finished products are in heavy demand and where construction and operating costs are lower.
However, Notley has noted that Alberta is already the base for Canada’s largest concentration of petroleum refining, petrochemical and chemical processors, with five operational oil refineries, four operational upgraders which process raw bitumen into synthetic crude for later refining and 11 major petrochemical plants.
Energy Diversification Act As well, she noted that her government introduced its Energy Diversification Act in March “to encourage and incent more partial upgrading” by offering up to C$1 billion in royalty credits, loan guarantees and grants to leverage private investment in diversifying Alberta’s petrochemical sector.
Projects that qualify for financial support include a C$3.6 billion petrochemical complex under development east of Edmonton and a potential C$4 billion propane dehydrogenation and polypropylene project scheduled for a final investment decision in 2019.
A second C$1 billion in loan guarantees and grants is aimed at construction of from two to five bitumen upgrading facilities.
Each of those plants, carrying capital costs of about C$1 billion, would reduce the need to dilute raw bitumen, allowing it to flow through pipelines. Currently, the Alberta industry spends C$13 billion a year on diluents, mostly imported from outside the province.
The Alberta government estimates those initiatives would attract C$10 billion in private investment, generate 8,000 construction jobs and hundreds of full-time jobs.
Debate moves slowly But that debate moves in fits and starts, in keeping with faltering attempts to launch new upgraders and against a backdrop of scorn from a former Alberta finance minister, Ted Morton, aimed at the North West Refinery, an Edmonton-area joint venture with Canadian Natural Resources that is Canada’s first new refinery in 30 years.
Morton ridiculed government efforts to bring the refinery’s first phase to completion as “boondoggles” and described government commitments as throwing “good money after bad” through loan guarantees and by providing 50,000 bpd of bitumen feedstock through a royalty-in-kind program.
The Northwest Refinery price tag for its Redwater facility soared from C$5.7 billion in 2013 to C$9.5 billion to achieve only modest current yields of 20,000 bpd of diesel that are forecast to achieve full capacity of 80,000 bpd this summer.
Ian MacGregor, president and chief executive officer of North West Refining, said no decision on proceeding with the second phase of Redwater is expected until the first is fully operational.
Marine fuel switch a factor However, he has been able to derive some encouragement from the International Maritime Organization, which regulates the global shipping industry and has announced the industry will switch in 2020 to fuel blends that emit less sulphur dioxide.
MacGregor said that development strengthens his argument that more Canadian crude should be refined in Alberta, allowing domestic oil producers to make better use of existing export pipelines by using fewer blending agents to dilute bitumen.
He said an indication of “what the future is going to look like” occurred last November when an outage on TransCanada’s existing Keystone pipeline to the U.S. required 8 million barrels of bitumen to be placed in storage.
When “anything goes wrong” with a very long transportation system it immediately depresses the price of raw bitumen in Alberta, whereas refined products would not be penalized to the same extent, MacGregor suggested.
He noted that the precipitous drop in Canadian heavy oil prices over recent years has hurt Alberta’s revenues, whereas oil producers who are sending their bitumen to Redwater are earning an extra C$23 on every barrel after paying fees to the refinery.
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