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Downgrading upgraders Voyageur mothballing blow to dream of making synthetic crude from bitumen Gary Park For Petroleum News
Ed Stelmach won’t give up, but he’s fast becoming a lone voice amid the wreckage of a dozen plans to build upgraders and refineries in Alberta.
With Stelmach’s long-held dream of seeing his province become the base for turning oil sands bitumen into synthetic crude for refining into transportation fuels headed for its biggest downfall, when Suncor Energy and Total signed the death warrant for their Voyageur project, the former Alberta premier made one last gasp plea.
He urged the province to “aggressively pursue every opportunity” to capture the so-far elusive value-added end of oil sands production that has already seen projects stalled or scrapped by companies such as China National Offshore Oil, Syncrude Canada, Royal Ditch Shell, Statoil, Peace River Oil and Husky Energy.
Maximizing pipeline space Making his first speech since retiring from politics in 2012, Stelmach told a business audience in Edmonton that it is in Alberta’s interest to promote as much pipeline takeaway capacity as possible.
“The transportation disadvantage, the small refining market for bitumen and the American use of policy tools to raise revenue for environmental purposes means we will always have that price differential,” he said.
But what is needed to shrink the price gap between heavy and light crudes that the government estimates is costing about C$6 billion in lost revenues requires Alberta to maximize pipeline space, Stelmach argued.
That requires the province to both upgrade and refine its crude bitumen rather than shipping the product in a mix of diluents and bitumen that is needed to transport the viscous heavy crude to market, he said.
“If our pipelines are going to be in short supply, we should be making maximum use of the space to send product — product, not filler — to get every dollar out of that quality,” Stelmach said.
Backing of processing During Stelmach’s stint as premier, the Alberta government agreed to back the Northwest Upgrader, a joint venture by North West Upgrading and Canadian Natural Resources — which will process bitumen the province collects as a royalty-in-kind, BRIK.
“As with all government actions, there was and there will continue to be some opposition to BRIK. But those resources are owned by Albertans and we must do what achieves the best results for the people,” he said.
Alberta Finance Minister Doug Horner said his government will look at any proposals that come forward to see if they are financially viable to add value to the province’s bitumen.
“I think the market will start to bear some of that out as time progresses,” he said.
Concrete shell Too bad for Stelmach and Horner that another reality is intruding, in the form of a concrete shell that has been sitting like a tombstone to a shattered hope for five years in the northern Alberta oil sands region.
The construction shell represents more than C$4 billion of work on the C$11.6 billion Voyageur upgrader by Suncor Energy, the 51 percent operator, and now sole owner since March 28 when its French partner Total pocketed C$515 million for selling its share of the asset to Suncor.
When the partners made official what has been seen as inevitable for months and abandoned Voyageur, they were merely affirming their view that North America is awash in light sweet crude, that capital costs for oil sands projects like Voyageur are on the upswing again and that, in any event, the economics of upgraders and refiners don’t work.
Judith Dwarkin, director of energy research at independent broker ITG, said that building upgraders in Alberta will not overcome the discounting of bitumen prices so long as there is a shortage of takeaway capacity.
She said Western Canadian producers have already saturated the markets that make the most commercial sense.
Dwarkin said upgraders make the most money when the spread between bitumen and light crude is wide, but that margin is unpredictable and fluctuates wildly.
Currently, the spread between Western Canada Select, a widely quoted heavy crude grade, has been about US$16.30 per barrel under West Texas Intermediate, compared with more than US$40 in January.
Jobs, economic benefits U.S.-based consultant IHS CERA coincided the Voyageur announcement with a report that argued shipping non-upgraded bitumen out of Alberta has the potential to create more jobs and economic benefits within the province, helped by directing high-demand labor to increasing oil sands production.
The report said that the projects that have been cancelled or delayed “reflect the reality that, in many cases, value-added upgrading and refining in Alberta does not equate with adding profit.”
IHS senior director Jackie Forrest said “new value-added upgrading and refining investments in Alberta have challenging economics and investors do not get a reasonable return on the billions they must commit for a bitumen processing facility.”
CIBC World Markets analyst Andrew Potter said the official mothballing of Voyageur — which has seen Suncor take a C$1.5 billion writedown in addition to its buyout of Total’s share — will “free up immense capital slated to be returned to shareholders (through share buybacks and dividend increases).”
TD Securities analyst Menno Hulshof expects the capital earmarked for Voyageur will now be directed to Suncor’s array of thermal-recovery oil sands projects, including its multi-stage 280,000 barrels per day Firebag operation and 273,000 bpd MacKay River, Lewis, Meadow Creek and Chard projects.
In addition, its two oil sands mining joint ventures remain intact — the 160,000 bpd Fort Hills project with Total holding 39.2 percent and Teck Resources with 20 percent and the 100,000 bpd Joslyn project, operated by Total, with Suncor, Occidental Petroleum and Japan’s Inpex as partners.
Andre Goffart, president of Total’s Canadian division, said the growth of unconventional oil and gas production means there is no shortage of diluents to blend with bitumen, eliminating “part of the rationale” for upgrading in Alberta.
Although neither Fort Hills nor Joslyn has been sanctioned, the joint venture with Suncor is working to develop the logistics to transport diluted bitumen, he said.
“With the right conjunction of logistics those projects shouldn’t be affected” by the decision to scrap Voyageur, Goffart said.
Plans still in works Despite the gloom over upgraders, not all proponents have given up.
Those still clinging to plans, in addition to the Northwest Upgrader, include:
•Calgary-based Value Creation which is working with Asian and Canadian companies to revive the 260,000 bpd Heartland Upgrader, which was mothballed after the global financial crash of 2008.
•Ivanhoe Energy, which hopes to establish a partnership this year to commercialize part of its upgrading technology to produce a crude that can be pipelined without diluents.
•Bitumen producer MEG Energy which is seeking regulatory approval for a demonstration-scale plant that can convert 1,500-3,000 bpd of bitumen into 1,350-2,700 bpd of crude that could also be pipelined without diluent, which MEG believes would have a broader market reach than either diluted bitumen or synthetic crude.
•The C$25 billion plan by newspaper publisher David Black to build a refinery at Kitimat on the British Columbia coast to process 550,000 bpd of crude bitumen, which got a lift from the IHS report’s conclusion that the British Columbia coast might offer better returns than Alberta.
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