Why Canada shouldn’t build more oil refineries
While B.C. Premier John Horgan isn’t known for his love of oil infrastructure, last week he was calling for new refineries to ease his province’s $1.55 a litre gas prices.
“Let’s make more (refined gasoline) here, creating more jobs here and relieving the enormous pressure on the travelling public,” he said.
Horgan is capitalizing on one of the most beloved and persistent myths in Western Canada: The notion that we would be richer, smarter and more employed if we could find a way to refine all of our oil at home.
Unfortunately, the theory is flawed in almost every way. Below, a primer on why Canada lets people buy our petroleum even if we haven’t turned it into gasoline first.
CANADA ALREADY EXPORTS MORE REFINED PRODUCTS THAN IT IMPORTS
In December 2017 Canada imported 1.4 million cubic metres of refined oil products while it exported 2.4 million — meaning Americans are burning way more of our gasoline than we’re burning of theirs. It may seem strange that Canada is simultaneously importing and exporting refined products, but keep in mind we are essentially a onedimensional country splayed along a 6,400 kilometre border with the United States; gas stations in Thunder Bay are generally going to have an easier time getting their fuel from Minnesota than Alberta. Either way, Canada’s relatively robust export market should make it clear that we have absolutely no problem refining our own oil when it is profitable to do so. It’s the “profitable” part of the equation that’s the tricky part.
EVEN OUR EXISTING REFINERIES AREN’T AT FULL CAPACITY
Nobody has ever accused an oil company of not knowing how to make money. So it is generally safe to assume that if Canada could make more money by refining more of its own oil, someone would have thought to do that by now. Case in point: Even the refineries we already have aren’t running full tilt. In 2017 Canada’s refineries ran at 84 per cent capacity, according to the National Energy Board. The story is a bit different in Alberta, where refinery use impressively topped 101.5 per cent in 2017 — but that still means eastern refineries are idle up to one fifth of the time. There’s even some wiggle room in U.S. refineries, which worked at 91 per cent capacity in 2017. It’s for this reason that Husky Energy CEO Rob Peabody said last month that North America is effectively maxed out on refineries. What’s more needed, he said, are new pipelines to connect Alberta’s oil with some of the continent’s more underused refineries. “If you can pipeline connect Alberta to North America, you don’t need a lot of new upgrading capacity built in North America — there is actually enough,” he added.
THE PEOPLE BUYING OUR OIL GENERALLY AREN’T INTERESTED IN OUR GAS AND DIESEL
Last year, Canada exported $67 billion in oil — most of it to the United States. Pretend that, tomorrow, Canada shut off all its oil exports and informed the Americans that if they wanted our petroleum, they’d have to start ponying up for some madein-Canada gas, diesel and kerosene. The likely result is that U.S. oil importers would give us a blank look before immediately calling one of the hundreds of other places that could sell them crude oil instead. “They’re not going to idle all of their refining capacity to suit Canada’s needs, they’re going to do what’s best for them, which is to continue to run their refineries,” said Jason Parent with Kent Group, a leading Canadian oil industry analyst. One major problem is that Canada has a hard time making gasoline cheaper than anyone else. The United States is the world’s most prolific refiner of oil — and most of its refineries are already paid off. China benefits from a one-two punch of lower labour costs and lax environmental standards. Against those odds, there are only so many ways in which a new Canadian refinery could expect to make competitively priced diesel and gas. “Although the return is still below that of Asia, a new refinery could work in Alberta or British Columbia given the right circumstances, but not without some risk,” was the most optimistic forecast IHS Markit could muster in a recent report.
GENERALLY, IT MAKES SENSE TO REFINE CLOSE TO MARKET
A refinery is a bit like a brewery: You can put it anywhere. Alaska is famous for its beer, and yet the barley and hops to make it are almost exclusively imported from abroad. Similarly, Japan’s coast is littered with refineries despite the country not having a single domestic oil well. There are a couple reasons for this. First off, refined products expire: From the time it comes out of the refinery, a litre of gasoline can have as little as a few months before it goes stale. Second, every market decides to use its petroleum differently. For instance, about half of the transportation fuel burned in Europe is diesel, while in the U.S. it’s as low as three per cent. The advantage of selling crude oil is that it can be sold to anyone, anywhere and at anytime. Once it gets refined, however, it turns into a perishable product with a much narrower group of people willing to buy it. Think of oil like lentils. Canada is the world’s largest exporter of lentils, and most of those leave our borders in their rawest possible state as dried, split grains. Canada could try “value-adding” those grains by insisting that they be processed into Bavarian lentil soup before export — but that’s going to be a problem if an Indian freighter pulls up looking for dal ingredients.
IT’S NOT REALLY ‘RAW’ OIL
It would be wrong to assume that Canada is simply stabbing a spigot into the ground, sucking up oil and then shipping it to the highest bidder. Canadian petroleum goes through an awful lot of job-creating steps before it gets poured into an oil tanker. In the oilsands, there’s the not-insignificant process of separating bitumen from sand. There’s also primary and secondary upgrading, where the molasses-like bitumen from the oilsands is heated and distilled into a purer product that can move through pipelines without dilution — up to 39 per cent of Alberta’s oil gets this treatment. The gist is that there are already hundreds of well-paid Albertans in hard hats “adding value” to Canadian oil — but only where it makes financial sense to do so.
WESTERN CANADA HAS BUILT ONE REFINERY SINCE THE 1970s, AND IT’S A BOONDOGGLE
It’s called the Sturgeon refinery. It’s in Alberta, it’s built by North West Refining and the entire project has been plagued by delays and unexpected costs that have more than doubled the initial estimate of $4 billion. Most notably, it was able to open only with hefty government support. The former Progressive Conservative government of Alberta kicked in loan guarantees for construction, and promised to supply up to $20 billion in free bitumen over the next 30 years. When it opened in March 2017, Canada was in the midst of a fuel glut. “They are paying $9 billion to build that plant and it’s only processing 50,000 barrels a day of bitumen … it was not good investment by the Crown,” John Auers, with the energy consultancy Turner Mason & Co., said at the time.
REFINING ISN’T ALL THAT LUCRATIVE
A common belief within the “refine-it-here” camp is that all the real money to be made in oil production is at the refinery. Last month, Green Party Leader Elizabeth May told the House of Commons that the oil sector is foolishly handing foreigners a “low value” product that is “very expensive to produce.” A 2014 report by the anti-pipeline Council of Canadians similarly touted the notion that exporting unrefined oil provides “little benefit to Canadians.” But as Alberta’s sky-high wages would attest, Canada isn’t exactly parting with its black gold cheaply. In fact, oil extraction is the single most profitable and labour-intensive component of the oil supply chain. In 2015, University of Calgary Trevor Tombe published a whole paper enthusiastically dismissing the “dangerous” notion that foreign refiners are fleecing Canadians of their oil. In fact, by plugging in economic data from Statistics Canada he found that oil extraction created more value than any other Canadian industry, including refining. “Oil and gas extraction creates $1.36 million in value added per job per year. This is 15 times higher than the national average,” he wrote. A 2013 report by the Macdonald-Laurier Institute came to similar conclusions. “More value lies in petroleum extraction and its transportation, not in its manufacture,” it wrote. While any country with a coastline can get into the refining business, “only a few countries, like Canada, are blessed with ample oil supplies,” it added.
CANADA STRUGGLE WITH ITS EXISTING PROJECTS
Five years ago, British Columbia media mogul David Black was in the pages of the National Post advocating for his Kitimat Clean refinery project. To be built at the end of the Northern Gateway pipeline, it would employ 3,000 people and generate up to $1 billion per year in tax revenue. “The refinery I am proposing will also be the cleanest in the world,” he wrote. Black even got the Industrial and Commercial Bank of China to back the project and find buyers for its product. But then, the federal government kiboshed the Northern Gateway pipeline and the project fell apart. Meanwhile, Energy East was cancelled, Keystone XL may have been irreparably delayed and just this week, Vancouver Mayor Gregor Robertson tacitly endorsed stopping Trans Mountain construction with illegal protests. These are not the actions of a country poised to roll out the red carpet for export-only oil refineries. The nightmare scenario is that Canada embarks on a wildly expensive refinery building spree, only to find that it has no ports or pipelines to sell it abroad. Supplies would glut, prices would plummet and whatever refining profits Canada once had would vanish. “You’d be destroying your own refining industry,” said Kent Group’s Jason Parent.