Commonly referred to as the “value chain”, the increasing quality from low-value heavy crude to high‑value refined products provides a broad spectrum of development options for players (Figure 1). The decision regarding how far along this chain of links to upgrade and refine bitumen is a function of risk, primarily associated with capital costs and expected long-term commodity prices.

link 1: Raw Bitumen (No Upgrading). Raw bitumen producers need to invest in the upstream surface mining operation or producing wells plus necessary facilities for oil separation and steam generation. As these projects are not linked to an upgrader, capital costs are lower. However, the price received for bitumen is also quite low, reflecting the high degree of refining needed to create usable end products. Bitumen producers are exposed to the highest degree of commodity risk, primarily associated with expected global light oil prices and light-heavy differentials. Heavy crudes are typically priced at a steep discount relative to light crudes (Figure 2). Additionally, bitumen needs to be blended with condensate or light oil in order to flow in pipelines. Bitumen producers therefore need to purchase these high-value products to mix with their bitumen (Figure 3). This incremental blending cost is subject to market fluctuations for light oil prices. Consequently, bitumen prices are highly volatile (Figure 4) and there are times when bitumen netbacks (cash flow) are negative even though WTI prices are high.

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