Why upgrading bitumen in Alberta is a non-starter
The conventional wisdom on upgraders needs to be "challenged"
Take a trip in a time machine. In 2008, 10 major oil sands upgrading facilities are on the drawing board, nine of them planned for Alberta’s industrial heartland on the outskirts of Edmonton. Alberta’s upgrading capability is set to expand by two million barrels per day.
The megaprojects have a mega-price tag – more than $100 billion altogether.
But the upgraders present challenges. Costs are increasingly unmanageable. Overruns are pervasive. And there are environmental concerns, particularly around cumulative impacts to water and air. Another worry is finding qualified people to build these world-scale facilities.
Fast forward to today. A very different landscape for upgrading in Alberta has emerged. Only a few projects are planned. Compared to 2008, only one-tenth of the previous investment is expected. What happened to upgrading in Alberta?
The point of an oil sands upgrader is to take heavy oil sands bitumen and convert it (or upgrade it) to light, sweet crude oil. The upgrader makes money on the price difference between the light barrel it produces and the heavy bitumen it consumes. The wider the difference, the more money it makes.
That spread collapsed after the recession, squeezing the economics of upgrading in Alberta. Globally, it has recovered, but the price difference is still too narrow to make upgrading projects work. Oil sands companies are already hard-pressed to build upgraders. They will grow more reluctant with access to global markets and the ability to shop around for better prices. Capital costs remain an obstacle. Building a comparable project on the United States Gulf Coast costs less than half of what it does to erect a plant in Alberta.
Upgrader investors must also consider the recent (and sudden) emergence of North American tight oil, a high-quality, light sweet crude produced with the same drilling and hydraulic fracturing technologies that proved to be game-changers in the North American gas industry.
Tight oil’s growth keeps surpassing expectations. In April alone, supply from North Dakota – ground zero for tight oil production – increased by 35,000 barrels per day from the previous month. With the growing possibility that North America could be awash in light, sweet crudes, investment in Alberta upgraders (which produce similar products) looks more uncertain.
To be sure, not all upgraders are created equal. The economics of brownfield investments look different; so do the economics for projects that yield higher value products like diesel. Assuming an upgrader produces a hefty yield of diesel, can keep a lid on capital costs, and the price gap between light and heavy crudes (both globally and locally) continues to widen, the economics – although challenging – could work. But the market for diesel in Western Canada is not bottomless, so this opportunity is limited to the early movers.
Supporters of value-added oil sands production say pipelines export jobs as well as bitumen. Alberta already has more jobs than qualified people. Adding upgraders only exacerbates existing shortages. In fact, assuming that Alberta and Canada have a fixed amount of construction workers for building all oil sands projects (a good assumption based on past experience), building upgraders actually displaces workers from other projects.
At peak, it takes about 6,000 construction workers to build a 100,000-barrel-per-day upgrader. If these same workers are deployed on in situ projects, they could build 300,000 barrels per day of new bitumen production capacity over the same time period. By diverting construction workers to upgraders, Alberta is forfeiting the bitumen production, royalties, long-term jobs and taxes that would result from the lost in situ projects.
Keep in mind, too, that an upgrader does not provide bitumen royalties to the province; challenging economics mean income taxes may not be substantial; and surprisingly, an upgrader provides fewer long-term jobs than an in situ project of comparable size.
In short, the conventional wisdom that upgraders mean more jobs and benefits to the economy needs to be challenged.