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Bitumen refinery could kick-start more projects

'Upgrader Alley' gets much needed boost with North West announcement

May 20, 2010

by Paul Marck

‘Upgrader Alley’ gets much needed boost

By Paul Marck

With the Alberta government’s announcement this week that it has started negotiations on the $4-billion North West upgrader project north of Edmonton, it was welcome news that the province’s oil sands industry is back on track with value-added development. The project was among several planned for the Industrial Heartland that were shelved during the recession as capital projects dried up across the energy industry.

There are two significant components to the announcement: It strengthens the province’s goal to ensure that 65% of all bitumen refining occurs in Alberta, and it adds a production facility to handle the government’s Bitumen Royalty in Kind (BRIK) program. That is the option that lets bitumen producers pay thieir royalties in oil, as opposed to cash, a provision that has been used for years on the conventional oil side. For the government, it adds up to 75,000 barrels per day of bitumen.

In putting out a request for proposals on handling its bitumen, the government asked industry for options for either buying the bitumen outright, or charging a fee to process it. Given that other oil sands producers who have their own upgraders already operate at capacity, the idea of establishing a merchant upgrader made the most sense.

But there is far from universal agreement over whether the North West upgrader is a sound business proposition or not. One argument suggests that a stand-alone merchant upgrader that is not directly tied to an oil sands producer is folly, because it relies on market forces rather than a guaranteed supply.  I don’t think there is merit to that debate. North West is slated to upgrade 150,000 bpd once it is fully operational. Given that the government will guarantee 75,000 bpd and North West partner CNRL has committed 25,000 bpd, that leaves the upgrader needing only to find another 50,000 bpd from other producers. Given that there are many more oil sands lease holders and producers than there are upgraders, it is not much of a stretch to believe that other sources will be found.

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Another argument against the feasibility of the North West upgrader is that there is a lot of idle refinery capacity in the U.S., and that TransCanada and Enbridge have excess pipeline capacity to deliver the bitumen to those Gulf of Mexico refineries. Both true. But so what?

Do we really want to ship more jobs out of Alberta just because American refiners are twiddling their thumbs? Their shareholders and those who hold pipeline stock or trust units might feel otherwise, but is that reason enough to ramp up the export of raw bitumen out of Alberta? I don’t think so. Resource economies, including ours, have been justifiably criticized in the past for the penchant to ship unprocessed or barely processed raw goods out of the province. Any economist will tell that such practices are simply bad business, in terms of developing a regional, sustainable economy.

Those extra jobs that would be created in Alberta for such potential opportunities in diesel fuel, petro-chemicals and related products certainly outweigh the take-the-cash-and-run scenario of shipping more bitumen to be processed elsewhere. It is government’s role to provide options and create an environment to give business the tools to be productive and prosperous. The North West upgrader — while still not a done deal — accomplishes exactly that. Good move.

The North West project could well be the catalyst that will spur a resurgence of activity in Upgrader Alley.

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