Calgary: The US shale oil revolution is forcing Canada’s oil sands industry to question whether there is a future in processing its crude into lighter oil, a tried-and-true way of wringing the most money out of a resource considered crucial to the country’s prosperity.
Suncor Energy Inc, which nearly 50 years ago pioneered the practice in Canada of mining and then upgrading the oil sands bitumen into refinery-ready light crude at the same site, served notice this month that the era of the integrated project may be ending.
It said it was reexamining a plan to build a multibillion-dollar upgrading plant in northern Alberta and taking a C$1.5 billion ($1.5 billion) charge to account for lower projected cash flow. The reason: cheap oil from North Dakota and elsewhere is making it uneconomical over the long haul to build such complexes.
“Why would you spend billions of dollars to build an upgrader to create a product that is looking to be oversupplied in the markets you can access today?” said Jackie Forrest, director of global oil for consultancy IHS CERA.
The Suncor move is more evidence of a shift from upgrading that is already well underway. Imperial Oil Ltd, for example, is building the C$12.9 billion Kearl development - the next major oil sands project to come online - without a processing plant.
The dilemma over upgrading points to more problems ahead as oil sands producers compete for capital against the developers of the cheaper, less damaging shale oil.
With less-processed heavy oil competing with the increased Bakken flows for pipeline space to US refineries, a glut in Western Canada has built up, generating a wide discount on Canadian crude against benchmark West Texas Intermediate. That has created an immediate problem, not the least for Alberta, the province at the center of Canada’s oil industry.
Alberta Premier Alison Redford blames the so-called “bitumen bubble” for a forecast C$6 billion shortfall in revenues in the coming fiscal year. Deep budget cuts are in the offing.
As a result, the province is pushing for ways to shore up its budget against the falling revenue stream, while unions are calling for more upgrading to create jobs.
The industry, however, seems to be moving in the opposite direction. The problem is, building a new upgrader - a tangle of pipes and vessels that transforms raw bitumen into an oil product easily used by standard refineries - costs billions of dollars and may make little sense over the long term.
In the short term, on-site processing would allow producers to boost the price of their product by upgrading it, and the wide price spread between cheap heavy oil and more expensive light crude would mean hefty margins.
Indeed, the gap has recently ballooned to more than $40 a barrel under US benchmark West Texas Intermediate, compared with a historical differential of less than $20.
But it takes years to build upgrading plants. In the meantime, new pipelines to export markets are expected to be built over the next decade - whether they are big ones such as TransCanada Corp’s Keystone XL pipeline or incremental expansions.
If that happens the discount on heavy oil should shrink. That would leave the multibillion-dollar upgrading plants less able to compete with shale oil.
IN THE PIPELINE
To be sure, the Keystone XL project - connecting the oil sands with the US Gulf Coast - is facing a full-scale push back from USenvironmental groups, and final approval from Washington is not guaranteed.
If the pipeline gets built, it would move 830,000 barrels a day of Alberta crude to Texas refineries, many of which are configured to process the heavier grades that are now imported from Venezuela, Mexico and elsewhere.
On today’s pipeline network, it costs about $8.50 a barrel to ship crude to the US. Gulf region from Alberta, traders say. When new pipelines are built, the light-heavy oil price spread is expected to come close to the shipping cost.
“You expect those bottlenecks will be gone, and once we get global pricing, we’ve actually seen fairly narrow differences between light and heavy crude,” said IHS’s Forrest.
Against that backdrop, Suncor says it hasn’t made a final decision on the proposed Voyageur upgrader, the centrepiece of its expansion strategy.
“We’re looking at all options,” Chief Executive Steve Williams said this month. “At one extreme you could go ahead with the project as it is. At the other extreme you could cancel the whole project and go ahead with nothing.”