Crude Awakening | The potential impact of the BRIK program on Alberta’s bitumen upgrading industry
As oil production looks to more than double by decade’s end, Alberta’s underdeveloped bitumen upgrading industry threatens to pump downstream jobs and revenue south of the border
by Scott Messenger
Photography by Dale Macmillan
It’s surprisingly easy to see the beauty of a bitumen upgrader on a moonless prairie night. The production of synthetic crude oil is no artless science, and it’s not expressed as such either. Under darkness, that stark industrial architecture is the backdrop for the interplay of amber flare and billowing smoke.
Likely, few appreciate such a scene more than Neil Shelly, executive director of Alberta’s Industrial Heartland (AIH). Had everything gone according to plan, he’d now be watching AIH transform into a giant city of perpetual light. Before the downturn, the region comprising the city of Edmonton and, to the northeast, a 533-square kilometre patch comprising Fort Saskatchewan and Sturgeon, Strathcona and Lamont counties, was poised to fully grow into its nickname of Upgrader Alley. In late 2006, seven newly proposed facilities or expansions were about to boost AIH’s crude production by at least half a million barrels a day. Then construction costs skyrocketed and the price of oil plummeted. “We’re coming off a horrible 2008 where virtually all the projects in the Heartland were cancelled,” says Shelly.
Oilsands producers found alternatives to AIH refineries by retrofitting existing facilities in the United States to process Alberta bitumen, diluted and shipped south by pipeline. As a result, says Shelly, $75 billion in capital investments (and with that Calgary’s role in becoming a hotbed of upgrader-engineering expertise) went unrealized, along with 75,000 person-years of construction employment, 12,000 permanent jobs and $3.6 billion in provincial and federal tax revenue. “This is above and beyond royalties,” he adds.
Currently, the majority of Alberta’s bitumen is upgraded in-province, but as major new extraction projects emerge without associated upgrader capacity – due largely to today’s high price of raw bitumen – Shelly’s numbers might represent the onset of a province-wide trend. Going forward, critics claim the focus on exporting means continued vulnerability to market fluctuations. It’s up to the Government of Alberta, they say, to reverse policies they allege have placed the province at that disadvantage. In response, recent royalty review introduced a potential stimulant. The Bitumen-Royalty-in-Kind (BRIK) program guarantees a feedstock supply to Alberta’s existing and startup upgraders. But will it lead to the diversification required to not only brighten the future of Upgrader Alley but also to generate the higher technology, value-added industry that could make Alberta’s hydrocarbon trade truly international?
Critics, of course, have failed to be impressed by the industrial marvels of Alberta’s oil and gas sector, going so far as to lean on the quotable William Blake to cast them in an overly dramatic, even ridiculously diabolical light. With respect to in-province bitumen upgrading, there are more fitting words to borrow from the English poet. Consider them, perhaps, a warning: “The foundation of empire is art and science. Remove them or degrade them, and the empire is no more.”
There’s little incentive to build that foundation. “At least based on prices in effect right now, there’s no real economic justification for upgrading because you can sell the blended bitumen at a very high price,” says Bob Dunbar, president of Strategy West Inc., a Calgary-based oilsands consulting firm. Based on his observations, a company can retrofit an existing U.S. facility to process bitumen for 30% to 50% less than the cost of building a new one here. For an
upgrader capable of processing 100,000 barrels per day (bpd), that means savings of billions of dollars.
It wasn’t always this way. Alberta’s oilsands once represented a “stranded” market where raw bitumen was cheap for the trouble it took to get it. Then, in 2006 Enbridge Inc. opened the floodgates by reversing a previously inbound pipeline to send bitumen to the Cushing, Okla., hub and thus onward to southern and Midwestern U.S. refiners, retrofitted for heavy oil. Since then, Alberta’s extensive network of pipelines has grown to a capacity of nearly 3.4 million bpd. By 2014, expansions and new projects could add as much as 2.7 million bpd. As Dunbar points out, “The ability to move that stuff to market is not really restricted right now and won’t be for the next several years.”
That’s good news for Gulf Coast refineries dealing with decreasing imports of Mexican and Venezuelan crude. (The proposed Altex pipeline, a conduit that could supply 425,000 bpd of oilsands output direct to Texas by 2014, will be even better news.) Some would also say that if bitumen prices remain high, it’s good news for Alberta. Gil McGowan isn’t one of them.
“If these trends continue, what we’ll see is a complete reversal of the proportion of bitumen upgraded in the province versus that exported,” says the president of the Alberta Federation of Labour, lobbyist for the province’s trade unions and producer of March 2009’s Lost Down the Pipeline, an argument for stronger government support for downstream processing. Instead of seeing two-thirds of current output upgraded in Alberta, he foresees two-thirds exported, along with more of the jobs and revenues Shelly watched evaporate from AIH. From his perspective, pre-pipeline, low-cost bitumen was the key to diversification through a value-added industry that, through offering refined hydrocarbons like gasoline, diesel and jet fuel, would be more stable due to increased access to the global market. “Knowing that, [the Government of Alberta] should have done everything in its power to protect that differential and take advantage of it.”
Since BRIK doesn’t address today’s thin difference between the prices of feedstock bitumen and synthetic crude, it doesn’t impress McGowan. BRIK makes the government an Alberta-biased middleman. Instead of taking royalty payments, it will accept barrels of bitumen (minus the value of associated transport costs paid by producers) and sell those at market price to a qualified Alberta upgrader, to a maximum of 75,000 bpd. To a startup looking for venture capital, BRIK would be the guaranteed supply that rounds out a successful business model.
But to McGowan’s consternation, BRIK involves no market regulation. Instead of granting a new oilsands lease only to a company committed to building an associated upgrader, for example, he says the government expects industry to pursue new business ventures currently tied to slim margins, with profits bound largely to volumes possible only through major upfront investment. For the right way to build the upgrading industry, says McGowan, we need to look backward rather than forward.
“Our key plea to government is that they steal a page from the Lougheed government on value-added development.”
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