An aggressive push for partial upgrading might generate $60 billion to $100 billion of capital spending in Alberta
For at past decade or so, the oil sands has been the economic engine of Alberta, helping create the highest per capita incomes in Canada and a prosperity envied by other provinces. Since 2015, that engine has sputtered thanks to tanking oil prices. A tune up (i.e. higher prices) isn’t enough to restore that prosperity. More radical repairs are needed, like the kind described in a new report from the Alberta Energy Diversification Advisory Committee that was released yesterday by Premier Rachel Notley.
EDAC makes two central points that all Albertans need to accept. [Full disclosure: I provided contract copy editing services for the final draft of the report]
One, the world is awash in crude oil and natural gas, prices will probably remain modest for the foreseeable future, and the energy transition now underway will gradually erode demand for Alberta’s primary exports.
That’s the risk for Alberta, the existential threat to the present.
Two, rapidly growing Asian economies need petrochemicals for consumer goods and Alberta has the competitive advantages (e.g. cheap natural gas feedstock) to compete with the Americans, who invested $185 billion over the past decade while Alberta attracted only $4 billion.
And upgrading low-value oil sands bitumen to a higher value medium or heavy crude oil can add value of $10 to $15 a barrel and free up as much as 30 per cent of pipeline capacity, the space currently occupied by diluent (required to make the peanut butter-like bitumen flow in a pipe), according to a 2017 study from the School of Public Policy.
That’s the opportunity, a strategy to mitigate risk for the existing energy economy and a vision to create a more prosperous future.
Notley gets it.
“We are blessed with a greater variety of natural resources than anywhere in the world, but right now we’re not getting full value for them. As we fight for new pipelines and a better price for our oil, we must also create the right conditions for investment and jobs in oil and gas processing and manufacturing,” she said yesterday at the press conference to release the report.
But is her NDP government prepared to take full advantage of the opportunities?
Yesterday’s announcement focused on partial upgrading, with petrochemical announcements coming in a few weeks, and the Alberta government is committing $1 billion over eight years to speed up commercialization of partial upgrading technology, hoping to have two to five plants on-stream by 2025 or so.
I asked energy economist Kent Fellows, one of the authors of the study, if Notley’s commitment is enough.
“I’m cautiously optimistic, but I don’t know if it’s too much or too little, we haven’t done that analysis yet,” he said in an interview.
“I will say there is a lot of value in the government being willing to step up and put some money into this. The big problem up this point has been, how do you de-risk the technology?”
Fellows argues that government assistance is justified because the oil sands resources is unique and Alberta can’t piggyback on another jurisdiction’s technology. The benefits of partial upgrading are so significant, as much as $22 billion added to provincial GDP over 20 years, that helping private investors get from bench testing and pilot projects to full commercial production is justified.
Even industry is on board.
The Canadian Association of Petroleum Producers has been a fierce critic of Notley’s regulations to lower greenhouse gas emissions, claiming that rising compliance costs make Canadian producers less competitive to an American industry basking in tax and regulatory relief from the Trump Administration.
But VP for Oil Sands Ben Brunnan likes what he sees from the EDAC report.
“The government has definitely heard messages from industry of what we think needs to be done to encourage investment. They’ve taken a comprehensive approach. They’re finding ways to try and de-risk investment and R&D,” he said in an interview.
“We think the government is really leaning into this in a way that’s pretty much doing the best they can to encourage investment.”
Fellows argues there is a very good chance Alberta’s pump priming for partial upgrading may be enough to kick start significant corporate investment in the technology.
“I think you’ll get knock-on effects once you get a number of these running at a market scale, you’re going to get a bunch of that risk out because it will be proved out. Once there is a market for [partial upgrading] it hopefully and probably won’t need government support,” he said.
The EDAC report envisions two to five partial upgraders with a capital cost of $5 billion.
But Fellows’ report, which used MEG Energy’s HI-Q technology as a case study, suggests a 100,000 b/d partial upgrader would cost $3 billion to $5 billion.
If we assume that by 2030 Alberta will have about two million b/d of bitumen that could be partially upgraded, that would lead to between $60 billion and $100 billion of capital spending, which would go a long way to replace lost capex in the oil sands, which grew from $18.1 billion in 2007 to $33.9 billion in 2014 but has been on the decline ever since, bottoming out at $12 billion.
IHS MarkIt analyst Kevin Birns says the oil sands has left behind its “construction phase,” is now in the “operations optimization phase” and is unlikely to ever hit peak levels again.
Partial upgrading alone can’t replace the roughly $20 billion a year of capital spending, but it could go a long way to being a “new oil sands.”
Perhaps combined with capital spending spurred by petrochemical investment programs that will be announced in a few weeks, that capital can in fact be replaced.
Carol Howe of PetroLMI says the Canadian oil and gas industry lost 52,000 direct oil and gas jobs (tens of thousands of indirect ones) after 2014 and only 17,000 are coming back by 2021. Experienced energy professionals like geophysicists and engineers, who once commanded high salaries and thought they had a job for life, are wandering the streets of downtown Calgary looking for work. Thousands of experience skilled tradespeople are out of work.
The committee’s recommendations won’t get the attention they deserve – unfortunately, ethylene crackers, natural gas straddle plants, and partial upgraders just aren’t that sexy – but they should.
EDAC has provided a road map to recapture the pre-2015 prosperity. Alberta should soup up its old jalopy and drive that road as fast as it can because competitors like the United States are driving race cars and the province could easily be left in the dust.
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