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

Apr 1, 2010  

by Scott Messenger

BITUMEN SNAPSHOT: There is plenty of upgrading capacity already built and more proposed, but there is a growing trend to ship bitumen for out-of-province processing
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If it sounds like he’s advocating interventionist administration, he is. McGowan’s the sort who looks back fondly on the Alberta Energy Company, a publicly owned progenitor of EnCana Corp. and, as a product of Peter Lougheed’s Progressive Conservative party, an investor in the seminal infrastructure of the petrochemical industry. As told in Alberta Formed, Alberta Transformed, a 2005 book from the Centennial History Society, the sector’s genesis involves a young Don Getty alerting then-premier Lougheed that it was Getty’s job as energy minister to sign natural gas removal permits. Lougheed put a stop to that, redirecting valuable natural gas liquids toward domestic production of a variety of chemicals and fertilizers that, more than 30 years later in 2007, accounted for international sales of more than $14 billion and employed some 7,000 workers.

Paul Clark, a founding member of the Hydrocarbon Upgrading Task Force (HUTF), an advisory body to the Government of Alberta, refers to the petrochemicals sector as “a wonderful working model” for Alberta’s upgrading industry. But the retired vice-president of research, technology and licensing for Nova Chemicals Corp. doesn’t endorse the outright “interference” Getty has admitted that natural gas exports required.

That said, “No one player can do it alone,” says Clark. “This is too big a prize and too big a challenge.”

HUTF’s vision of the government’s role in development has always been of a “guiding hand,” as Clark puts it, but also one that, sleeves rolled up, gets dirty. A proposal HUTF commissioned from Houston-based petrochemical consultant David Netzer saw the government pitching a Heartland-based upgrading, refining, petrochemical and power generation complex to industry investors in 2006. It would have been the biggest in the world and likely the most expensive; a price of around $10 billion killed the project outright.

Looking back, Clark calls the Netzer plan “a benchmarking enterprise. The notion there was to take existing technologies and bundle them into an upgrader and see what it costs.” To see Alberta’s upgrading industry follow the path of petrochemicals, he believes hands-on work besides BRIK remains to be done. For that reason, he’d like to see a pilot project – processing up to 1,000 bpd of bitumen – involving skeletal infrastructure (like a vehicle chassis, he says) provided by government that would support industry-driven upgrading technology. While this might sound like little more than a subsidized engineering geek-out, it could awaken industry to new routes to profitability. But even this, says Clark, would cost around $250 million, a tough sell in a downturn. Even with BRIK, and even if he believes the petrochemical precedent bodes well, to him that cost means one thing:

“We’re a long way yet from Upgrader Alley.”

Or at least a few years. While several projects remain in limbo (see illustration, top of page), some producers are looking ahead to when bitumen prices lag far enough behind light crude to generate a profit.

“Maybe for the time being, yes, bitumen is not too difficult to sell,” says Jean-Michel Gires, president of Total E&P Canada Ltd., one of three companies (including Shell Canada and its ongoing Scotford expansion) with anything more than tentative plans for upgrading in AIH. “But look at the situation over the last decade when bitumen was very tough to sell. The netbacks were pretty low if you were not a refiner.”

While Total’s proposed upgrader (to process 150,000 bpd in Phase 1, nearly 300,000 with Phase 2) is six or seven years in the making and, Gires admits, remains contingent upon development of the company’s oilsands assets, it represents an uncommon mindset. Even with its refinery in Port Arthur, Texas, undergoing retrofitting, Total believes shipping it bitumen doesn’t make economic sense. Expansion of its Surmont project near Fort McMurray will increase output from 27,000 bpd to nearly 110,000, its Joslyn mine could one day yield another 200,000 bpd and its Northern Lights lease awaits development. Especially in the event of the price correction Gires expects for bitumen, he says, “We would definitely prefer… a [closer] upgrading solution.”

BRIK isn’t an incentive for Total. An Alberta upgrader would “close the loop,” says Gires, on operations that, with bitumen as an end product, remain open-ended. It’s a long-term strategy that runs counter to just riding the crest of a wave that might prove to be as aberrant as $147 oil. And, besides anticipating future profit, it also recognizes the potential of a shortage of diluent required to move bitumen via pipeline and the current dip in construction costs.

But for smaller players, BRIK could be a benefit. This January, North West Upgrading (NWU) Inc., was one of a handful of companies to file BRIK applications. With 12,500 bpd already set to come from project partner Canadian National Resources Ltd. for Phase 1 of the bitumen upgrader-refinery (a 150,000-bpd facility upon completion of Phase 3) set for construction in AIH, NWU appealed to the government for 37,500 bpd more. A combined 50,000-bpd supply, chairman Ian MacGregor hopes, will be sufficient to generate investment on the order of the $4 billion to $5 billion needed to build the facility and, as he sees it, start moving the province toward a stronger value-added industry.

“We think the world is changing,” says MacGregor. The U.S. has proven a reliable consumer, he points out, but what does the future hold? “We think Alberta should be selling its products internationally and we think that if you make the right stuff, you can sell it.”

As he sees it, following that central tenet of entrepreneurialism would mean upgrading and refining, for example, a $50-barrel of bitumen into a $120-barrel of diesel that could be sold, in comparison to its precursor, virtually anywhere in the world. And if those BRIK barrels don’t come through?

“We don’t give up. We’ve spent the last five years doing this. We’ve spent almost $400 million on it. We’re going forward somehow.”

It may be that reaction that best sums up the true value of BRIK. On the one hand, even for a small company like NWU, it’s of an order of significance that a ready alternative could likely be located, making it, as Gil McGowan asserts, “too little, too late.” On the other, it offers a secure supply, and, as such, a tacit admission there’s an economic diversification issue that needs addressing – and that that process has begun.

In a way, BRIK is a distinctly Albertan innovation. It isn’t necessarily designed to turn AIH, for example, into an unmatched industrial spectacle because it’s not designed to force any player’s hand. Instead, it’s meant to encourage and enable. And it relies entirely on the entrepreneurial spirit that most say made this province, calling on industry and investors to take into their hands, if not the fate of “the empire,” then a few hundred thousand barrels worth of its potential.

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