Downgrading the upgraders

Alberta government refines its stance toward building bitumen upgraders in the province

Whatever happened to the great upgrader boom that never was?

In 2010, then-Alberta energy minister Ron Liepert said the government wanted to keep 65 per cent of bitumen in the province for upgrading. At the time, the province estimated it had access to potentially 400,000 barrels per day of bitumen under its Bitumen Royalty in-Kind (BRIK) program, which it could use to encourage development.

Skip ahead just a couple of years and the debate about domestic upgrading has been laid to rest in the halls of power, even as it still rages on in the offices of industry.

Since taking his post in April, Alberta Energy Minister Ken Hughes has signalled his lack of interest in getting involved in luring new upgrading capacity to the province. He argues that North America has adequate capacity to handle growing bitumen production from the oilsands, making it unlikely that the government will encourage new upgrader construction within the province.

On top of that, the former businessman says Alberta's tight labour market is likely to get even tighter as new oilsands projects are built. For the minister, that's a good argument against the government taking any unusual measures to encourage upgrading.

"I'm an entrepreneur and I've seen what it's like in other industries [faced with labour shortages]," he says.

"When we have a tight labour market in the oilsands, do we really want to see something like 2008 again?" Hughes asks, referencing the labour shortage and cost escalation suffered by the oilsands industry just before the global financial crisis cooled down construction.

The minister's stance contrasts starkly with that of the government under former premier Ed Stelmach, which was a strong advocate of the BRIK program. Under BRIK, oilsands producers could contribute bitumen instead of royalties to the government.

But Hughes and his boss, Premier Alison Redford, are making it clear there will be no plan beyond BRIK to encourage upgrader development. And even then, the minister is hesitant to get involved unless necessary.

"We are fully prepared to use a strategic asset like BRIK if we need to prime the pump, but it needs to be in the public interest," Hughes says.

The new minister also does not share the previous government's concern about bitumen leaving the province to be processed in upgraders and refineries in the United States. "There's no need for us to be involved if we have diverse markets for our products," he says.

The Redford government has already rejected one request for BRIK involvement in an upgrader. In February, Teedrum Inc. announced its 125,000-barrel-per-day upgrader had been deemed not economically viable by the province. The fate of the $6.6-billion facility is now in doubt.

However, Hughes still sees progress on the upgrading front. "There are five upgraders in Alberta today, and the North West upgrader is going ahead and it looks like Voyageur is going ahead, too," he says. "These are very big projects."


Jointly owned by North West Upgrading Inc. and Canadian Natural Resources Limited, the North West upgrader will access feedstock through the BRIK program.

The Alberta government has agreed to provide 37,500 barrels per day of bitumen for the $5-billion first phase of the project, located near Redwater, Alta. Canadian Natural will provide another 12,500 barrels per day of bitumen from its Horizon oilsands plant and other assets.

North West expects to complete the first phase of the upgrader by late 2014 or 2015, with a second phase of 50,000 barrels per day already announced. A third phase could possibly follow further down the road.

At peak, the company estimates the project could create 8,000 construction jobs. So far, several companies have already signed up to take part in the mammoth undertaking, with PCL Industrial Management Inc. and SNC-Lavalin Group Inc. both providing project management services.

In contrast, the province's other planned upgrading project-Voyageur-does not have a BRIK component. The 200,000-barrel-per-day facility is owned by Suncor Energy Inc. and Total SA, divided 51 per cent and 49 per cent, respectively. It is expected to cost as much as $20 billion.

While still in the early stages, the project is starting to move forward. In the first quarter of 2012, the companies were finalizing the scope of the project, developing an execution plan and preparing the site for construction, Suncor spokeswoman Sneh Seetal says.

Bird Construction Inc. has been awarded a $69-million contract to do foundation and groundwork on that project, which would be located at Suncor's plant site near Fort McMurray, Alta. Seetal says site preparation has begun and work on concrete foundations, earthworks and underground piping will continue through 2013.


Such major construction projects bring with them inevitable economic spinoffs, including added government revenue, argues North West chairman Ian MacGregor.

He says the economics of upgrading are even more justified now than when the North West project was first proposed six years ago because of the differential-what processed bitumen could sell for versus what it fetches raw.

"The margins have been high, and if this plant had been in production last year, the Alberta government would have earned about $500 million more than it would have by just selling raw bitumen," he said recently. "They are taking our raw bitumen in Houston and turning it into diesel for export. There is no reason why we can't export diesel directly from Alberta."

MacGregor claims upgraders can multiply the value of bitumen by as much as 2 ½ times.

The Alberta Federation of Labour, which represents the province's unionized construction workers, is also a supporter of measures to stimulate the construction of more upgraders.

It helped fund a report that concludes just four new upgraders would create 52,000 person-years of direct construction employment, 4,000 permanent jobs and 12,000 jobs dedicated to the supply and maintenance of those upgraders.

The report suggests the provincial government would bring in $440 million a year in tax revenue if the upgraders were built, while the federal government would see $780 million a year added to its coffers.


However, not everyone shares the pro-upgrader mindset.

For example, the Canadian Association of Petroleum Producers (CAPP) was cool towards the BRIK deal for North West when it was announced 18 months ago.

At the time, CAPP oilsands and markets vice-president Greg Stringham said it appeared as if the government was providing an "incentive" to get the project built-one CAPP didn't feel was necessary.

About 62 per cent of the bitumen produced in the province was being upgraded within Alberta at the time the announcement was made, according to Stringham.

"We have over a million barrels a day of upgrading capacity in Alberta," he says. The North West and Voyageur projects would add to that total.

Meanwhile, U.S. refiners either have spent or will spend more than $30 billion to expand or retrofit existing refineries to process bitumen and heavy crudes. And a report by consultants Strategy West Inc. concludes it will cost 30-50 per cent less to add coking capacity to existing refineries in the United States than to build greenfield upgraders in Alberta.

Neil Shelly, executive director of Alberta's Industrial Heartland Association, seems to have resigned himself to the provincial government's hands-off attitude regarding upgraders.

"She [Premier Redford] doesn't seem all that enthused [about BRIK and other incentives]," he says.

After talking to Hughes, Shelly got the impression that BRIK may simply fade away. He believes the provincial government will only act to promote upgrader construction if it believes a "catalyst" is needed.

"I think the horse has already left the barn," Shelly says, rattling off the names of the upgraders he expects to see built in the province. It's a short list.

"We'll get North West and Voyageur," he says.



Alberta Energy Minister Ken Hughes is not worried about volatile oil prices leading to a significant decline in energy-related investments in the province, arguing that companies are unlikely to pull the plugs on multi-billion dollar oilsands projects because of short-term price swings.

"We're price takers as far as energy production is concerned," he told Alberta Construction Magazine. "We know from experience there will be volatility in the price of oil, and that's the reality we live with. The larger projects are based on long-term perspectives, and the assumptions about prices are built into the projects."

Because of the growing concerns about the fate of the Eurozone economy and a deepening recession in peripheral countries, such as Greece and Spain, along with slowing growth in the developing world, oil prices have swung widely in the first half of the year. Brent and West Texas Intermediate (WTI) reference prices were both well over $100 a barrel earlier in the year and both have lately traded well under $100 a barrel, with some commodities experts saying WTI could dip below $70 this year and remain there for months.

In addition, because of a lack of pipeline access, Alberta heavy crudes have been trading at discounts from WTI of $15-$20.

While these lower prices have an impact on Alberta government revenues-a $1 drop in prices could reduce the government's royalty and tax income by $100 million or more-Hughes seems sanguine about the longer-term strength of the province's energy industry. Much of that confidence appears to based on the billions of dollars being invested in long-lived oilsands projects.

However, Hughes is concerned about the lack of access for Alberta oil and bitumen to markets in the United States, Asia and elsewhere.

"The reality is [that] Alberta and Saskatchewan are landlocked jurisdictions," he said. "That's why the government of Alberta supports all efforts to increase that access."

But while the government is pro-development, Hughes said it must be balanced.

"We have to perform at an exceptionally high level of environmental oversight," he said. "As we do that, we have to help the rest of the world understand what we're doing, so we're not [vulnerable to] unfair and inaccurate attacks."

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