Back to the future

Am I seeing things or has the Canadian energy sector, specifically Alberta, been forced into an economic version of Back to the Future?

Recently, Alberta premier Rachel Notley proudly “podiumed” that the province will provide $400 million in loan guarantees to support the construction of an upgrader and refinery, that will process 77,500 bpd of bitumen into a medium grade oil that is claimed can be processed at most North American refineries. The press conference announcement was vague on details, but apparently the plant, (or plants) will produce diesel and another “specialty product in high demand,” which I suspect is naphtha used in the petrochemical industry.

It is also claimed that the technology to be used at this facility will eliminate the need for diluent to be added to the raw bitumen, reducing its viscosity allowing it to flow through pipelines. With no diluent needed, this will free up pipeline space for the newly upgraded crude oil, and any other crude for that matter.

To be clear though, this has nothing to do with Western Canadian Select (WCS) because it is a blend of heavy, sour crudes and is refinery-ready, not needing any form of upgrading.

Let’s go back in time – eleven years to 2008.

A proposal was presented to the then Conservative government for the construction of an upgrader/refinery that would process 79,000 bpd of feedstock made up of 50,000 bbls of bitumen and 29,000 bbls of diluent, producing 40,000 bbls of diesel, 28,000 bbls diluent, plus “other products,” that ended up being naphtha. At that time, the anticipated cost was $4 billion to be paid ultimately by the Alberta tax payers. Construction began in 2013.

Now let’s fast forward to 2019.

The cost is now sitting at $9.7 billion, with the first of the three phases not yet running and the second phase suspended due to unfavourable market conditions and technical difficulties.

Over the 30-year period of the Provincial Government’s agreement, it’s the taxpayer who is now on the hook to the tune of $30 million per year.

Colour me stupid, but after 11 years this latest proposal looks the same as the last one, just with fresher paint.

Upgrading works when the processed, end product is higher priced than the feedstock. Today, diesel pricing is depressed in Alberta due to a saturated Alberta refinery fed market, and with the Notley government now forced to cut crude production, the spread between WCS and Western Texas Intermediate (WTI) has narrowed, not widened.

So, the stars are out of sync. But that’s the problem as market conditions in the oil patch are not sedentarily stagnant, but in a perpetual state of flux.

Upgrading bitumen, removing diluent, and producing a new and improved crude oil feedstock looks great on paper, but paper is only paper thin. Even if the latest proposal works in future’s future, it still only compounds the problem, it does not solve it.

With more space on the pipeline, more crude will fill it up, which brings us back to the present and it can’t be avoided. More crude means we need more pipelines to get to more customers.

Or is that me just having an obsolete DeLorean moment?

~ The Grouch

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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