Upgrade bitumen rather than build more pipelines

Kinder Morgan project not needed, says Douglas Taylor.

The debate over the Kinder Morgan expansion project has become polarized and politicized. The growing controversy is occurring while there is evidence the additional capacity the expansion would provide is unnecessary and Alberta’s diluted bitumen would not get a higher price if shipped to Asian markets.

Alberta’s oilsands presently produce about 2.7 million barrels per day ( bpd) of raw bitumen. Forty per cent of the raw bitumen is upgraded to a higher value product that can be transported via pipeline. Sixty per cent, or 1.6 million bpd, is blended with expensive diluents to enable it to flow in a pipeline. The producers of raw bitumen must pay for the costs of blending, shipping and handling the diluent. This significant added expense is referred to as the “diluent penalty.” About 680,000 bpd of diluent is required to transport 1.6 million bpd of raw bitumen. The diluent, unwanted by buyers, takes up about 680,000 bpd of valuable pipeline capacity.

Alberta’s upgraded bitumen, diluted bitumen and conventional oil is shipped to U.S. markets, primarily in the Midwest and Gulf Coast, in a pipeline network with the capacity of four million bpd. When the Enbridge Line 3 replacement and the Keystone XL projects are completed, the total pipeline capacity will be 5.2 million bpd, an increase of 1.2 million bpd over current capacity.

If the additional 1.6 million bpd of Alberta’s existing raw bitumen was partly upgraded, it would free up an additional 680,000 bpd of pipeline capacity now used for diluent. This would bring the total pipeline capacity to about 5.9 million bpd, an increase of 1.9 million bpd over current capacity. This increase would be achieved without pipeline expansion. Lack of pipeline capacity appears to not be a deterrent to new investment in oilsands production.

Partial upgrading of raw bitumen is expensive. Industry estimates indicate the capital cost for facilities to partly upgrade 1.6 million bpd would be about $45 billion. The construction of partial upgraders, apart from freeing up valuable pipeline capacity, would produce a product priced at $10 to $15 higher than diluted bitumen, It will also remove the expensive diluent penalty that could be as high as $10. The engineering and construction of these projects would create thousands of high-paying jobs for Albertans and work for equipment suppliers across the country.

Many believe the pipeline expansion is required to provide access to Asian markets and higher world prices. There is however clear, market-based evidence that higher prices would not be achieved by shipping to Asia. Western Canada Select (WCS), an Alberta benchmark blend, is considered to be very similar in quality to Mexican Maya heavy oil. WCS is presently priced at $52 at Hardisty, Alta. The equivalent Mexican oil is priced at $60 delivered in Asia. If the WCS was shipped to Asia, then the price at Hardisty, after deductions for pipeline, tanker and handling costs to Asia, would be less than the current price of $52. Continued reference is also made to the WCS price discount against West Texas Intermediate (WTI). The discount is at 22 per cent and compares very favourably to the average discount of 24 per cent over the past 12 years. It should be noted that WTI is priced higher mainly because it is of much higher quality.

Since the pipeline expansion is not required and because higher prices will not be achieved by shipping to Asia, construction should be suspended.

Investment in partial upgrading should begin and the planned expenditure of $1.5 billion for spill response should be redirected, perhaps into R&D to define new ways to best use the valuable oilsands resource.

A significant early benefit will be avoidance of the risks associated with shipping 40 billion litres of diluted bitumen annually through an earthquake zone that includes the City of Burnaby and the Burrard Inlet.