Re­fin­ing? Where’s The Value In That?

Partial bi­tu­men up­grad­ing in Al­berta sounds like a good in­vest­ment for the prov­ince. But an eco­nomic ques­tion mark hangs over the whole the­ory of “value added”

Alberta Oil - - CONTENTS - By Markham His­lop

Partial bi­tu­men up­grad­ing and petro­chem­i­cal de­vel­op­ment in Al­berta sound like a good in­vest­ment for the prov­ince, but the eco­nom­ics of re­fin­ing are different when it comes to “adding value.”

For decades Al­berta pre­miers have tried to de­velop value-added pro­cess­ing of the prov­ince’s abun­dant hy­dro­car­bon re­serves. Now, it’s Rachel Not­ley’s turn. The NDP Pre­mier has tasked a com­mit­tee with draft­ing an en­ergy di­ver­si­fi­ca­tion strat­egy, with a re­port ex­pected this spring.

Economist Michal Moore says the job-cre­at­ing up­graders and re­finer­ies de­manded by unions and NDP sup­port­ers dur­ing the 2015 provin­cial elec­tion are yes­ter­day’s game. But two new petro­chem­i­cal plant projects and a Univer­sity of Cal­gary study on the eco­nomic ben­e­fits of partial up­grad­ing of bi­tu­men in­di­cate a new value-added strat­egy for Al­berta.

Moore is a se­nior fel­low at the School of Pub­lic Pol­icy for the Univer­sity of Cal­gary. He wor­ries that, thus far, the Not­ley gov­ern­ment is miss­ing the big pic­ture when it comes to wring­ing more value from gooey bi­tu­men. “I mean, it’s like lis­ten­ing to [U.S. Pres­i­dent Don­ald] Trump. There’s no strat­egy, no vi­sion go­ing for­ward and where you want to be in 10 years,” Moore says. “I don’t know how they’ll at­tract cap­i­tal and I don’t know what the end prod­uct is likely go­ing to be. I don’t know where they’re headed.”

The strat­egy is forth­com­ing. The Al­berta gov­ern­ment struck its ex­pert panel, called the En­ergy Di­ver­si­fi­ca­tion Ad­vi­sory Coun­cil, in Oc­to­ber. Its man­date is to ex­plore op­tions for en­ergy di­ver­si­fi­ca­tion, in­clud­ing partial up­grad­ing and re­fin­ing. Not­ley has hinted that she could use oil and gas roy­al­ties to “in­cent” tech­no­log­i­cal in­no­va­tion. Moore agrees that new or sig­nif­i­cantly more ef­fi­cient pro­cesses are needed to over­come Al­berta’s in­her­ent dis­ad­van­tages, and he thinks provin­cial en­trepreneurs are up to the chal­lenge. “I think that the ad­vances over the next five years or so are prob­a­bly go­ing to be with new chem­i­cal plants and new chem­i­cal tech­niques. And it’s go­ing to likely trans­form the way we think about hy­dro­car­bons,” he said. “I put a lot of faith in Al­berta en­trepreneurs and I think if they face a clear set of rules, they’ll de­liver.”

When writ­ing its re­port, the di­ver­si­fi­ca­tion coun­cil will have to con­sider how to over­come two bar­ri­ers. One is the NDP’s own cli­mate poli­cies, which seek to limit green­house gas emis­sions with­out a car­bon cap­ture pro­gram for re­finer­ies and up­graders. (Al­berta ac­counts for 36 per­cent of Canada’s to­tal GHG emis­sions.) Up­graders, like the Husky op­er­a­tion in Lloy­d­min­ster, heat crude oil to about 500C, then cool it to be­low 70C for trans­porta­tion via pipe­line to a re­fin­ery, where it is heated once again. “With a stand­alone up­grader and a re­mote re­fin­ery, the GHG emis­sions are go­ing in the wrong direc­tion,” says Bruce Peachey, a pro­fes­sor of petroleum engi­neer­ing at the Univer­sity of Al­berta.

The sec­ond ob­sta­cle, ac­cord­ing to Moore, is that while the age of oil is far from over, the North Amer­i­can mar­ket for oil is rel­a­tively flat. “I look at the mar­ket for en­ergy and I see that it’s changing quite a bit, re­flect­ing the fact that it’s go­ing to be an elec­tric world out there. It’ll take 40 years to get there, maybe longer, but the tran­si­tion’s al­ready oc­cur­ring,” he says. “So, the last thing you want to do is chase some­thing that’s di­min­ish­ing.”

Aside from the 80,000 b/d Phase 1 of the Stur­geon Re­fin­ery, which will start up later this year and re­ceived fi­nan­cial sup­port from the Pro­gres­sive Con­ser­va­tive gov­ern­ment of Pre­mier Ed Stel­mach, Al­berta has seen the last of its new up­graders and re­finer­ies, ac­cord­ing to Moore. “I cer­tainly don’t dis­agree that if there was a way to up­grade raw bi­tu­men in Al­berta, it would be a tremen­dous ad­van­tage, for both the gov­ern­ment and em­ploy­ment,” he says. “But, you can’t push a string. If the mar­ket isn’t go­ing to sup­port it, or if those markets have changed, if there’s not enough cap­i­tal to un­der­pin it, you can’t wish away the real world.”

The last time the North Amer­i­can re­fin­ing in­dus­try went on a build­ing binge, bell bottoms and lava lamps were all the rage. Com­pa­nies built re­finer­ies close to markets and near ports that fa­cil­i­tated im­port­ing crude oil and ex­port­ing re­fined prod­ucts. Sig­nif­i­cant in­fra­struc­ture, in­clud­ing pipe­lines and stor­age, were built to sup­port those in­vest­ments. “Once you in­vest that cap­i­tal, it’s not go­ing to move around,” says Moore. “That’s why the last big re­fin­ery for gaso­line de­vel­oped in the late-70s, be­cause the mar­ket has been rel­a­tively flat for those types of prod­ucts. So, you tend to fix and re­pair your own but no one wants to build a new one.”

Even worse news for Al­berta is that all that cap­i­tal spent 40 years ago by U.S. in­vestors has cre­ated clus­ters of re­fin­ing and pro­cess­ing—like the Texas Gulf

Coast, where much of the U.S. heavy oil re­finer­ies are lo­cated—that are very hard to com­pete against. The ex­ist­ing play­ers have long-term busi­ness re­la­tion­ships with their cus­tomers in a slowly de­clin­ing mar­ket—not ideal con­di­tions for a new Al­berta com­peti­tor. “Once a com­peti­tor cap­tures a mar­ket, it’s very hard to wrest it away,” says Moore.

But if re­fin­ing and full up­grad­ing are not on the ta­ble, partial up­grad­ing could be. School of Pub­lic Pol­icy re­searchers be­lieve there is a mar­ket niche for medium to heavy crude oil that is par­tially up­graded from bi­tu­men.

New tech­nol­ogy al­lows a 100,000 b/d plant to be built for about $3 bil­lion— chump change com­pared to a re­fin­ery. And the ben­e­fits for in­dus­try, the Al­berta econ­omy and the provin­cial gov­ern­ment are con­sid­er­able: a $10 to $15 per bar­rel in­crease in the value of bi­tu­men; no need for dilu­ent (which com­prises 30 per­cent of dil­bit), which would in­crease the amount of bi­tu­men pipe­lines can carry; and an an­nual boost to Al­berta’s GDP of $505 mil­lion with plenty of jobs and an ex­tra $60 mil­lion a year in provin­cial tax rev­enues.

With about 60 per­cent of Al­berta’s 2.3 mil­lion b/d of oil sands pro­duc­tion not up­graded, and an­other 800,000 b/d of new pro­duc­tion com­ing on­line in the next five years, partial up­grad­ing is a pretty safe bet to be in­cluded in the new di­ver­si­fi­ca­tion strat­egy.

The same can be said for petro­chem­i­cals. As soon as the oil and gas roy­al­ties re­view panel rec­om­mended it, Not­ley launched the Petro­chem­i­cal Di­ver­si­fi­ca­tion Pro­gram in Fe­bru­ary 2016 and 10 months later two projects were of­fered fi­nan­cial sup­port.

Pem­bina Pipe­line’s joint ven­ture with Kuwait’s Petro­chem­i­cal In­dus­tries Com­pany was ap­proved to re­ceive up to $300 mil­lion in roy­alty cred­its to build an Ed­mon­ton-area fa­cil­ity that will use 22,000 b/d of propane to pro­duce up to 550,000 tons a year of polypropy­lene plas­tic pel­lets for ship­ping to other markets. In­ter Pipe­line’s com­plex will also man­u­fac­ture polypropy­lene and re­ceive up to $200 mil­lion in roy­alty cred­its. About 1,400 di­rect and in­di­rect full-time jobs will be cre­ated when the plants open in 2021.

The fu­ture looks bright for the value-added pro­cess­ing of Al­berta’s hy­dro­car­bons, in­clud­ing oil sands bi­tu­men and NGLs. Be­tween partial up­grad­ing, petro­chem­i­cals, and op­por­tu­ni­ties pro­vided by new tech­nolo­gies, the provin­cial in­dus­try seems poised to wring more profit from a dif­fi­cult feed­stock. That said, as ex­ec­u­tives con­sis­tently point out, the devil is al­ways in the de­tails, some of which will be­come clear this spring when the Not­ley gov­ern­ment re­leases its eco­nomic di­ver­si­fi­ca­tion strat­egy.

“I look at the mar­ket for en­ergy and I see that it’s changing quite a bit, re­flect­ing the fact that it’s go­ing to be an elec­tric world out there. It’ll take 40 years to get there, maybe longer, but the tran­si­tion’s al­ready oc­cur­ring. So, the last thing you want to do is chase some­thing that’s di­min­ish­ing.” michal moore, se­nior fel­low at the Univer­sity of cal­gary

feb / mar 2017

for­mer al­berta pre­mier peter lougheed over­saw a boom in re­fin­ery and petro­chem­i­cal plant con­struc­tion in the 1970s

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