Done right, Alberta energy diversification strategy could actually work

Alberta energy diversification should include partial bitumen upgrading, petrochemicals, expansion of oilfield services/manufacturing

Economic diversification rarely works. Canadian governments have wasted many billions over the decades, chasing this or that economic flavour of the week that never pans out. But the Alberta government finds itself in the unique position of being able to back an energy diversification strategy that might actually produce tangible results.

Back in October, Premier Rachel Notley struck the committee to “explore opportunities for increasing the value of Alberta’s resources and creating more jobs.”

The Alberta Energy Diversification Advisory Committee won’t be reporting until the spring, but with the release of a study last week on the partial upgrading of bitumen, the outline of a potential strategy is becoming apparent.

Let’s just hope the committee doesn’t ignore low hanging fruit in the existing oilfield manufacturing sector.

The committee’s mandate asked it to review bitumen partial upgrading, refining, and petrochemical manufacturing.

Given the structure of the North American refining and petrochemicals industry, says Prof. Michael C. Moore of the University of Calgary, there is no chance Alberta will be home to another major refinery or upgrader. The 80,000 b/d Sturgeon Refinery, scheduled to be completed this year, was possible because of significant government support and a need for more fuel supply in local markets.

But 40-plus years ago, during the last refinery boom, industry chose to cluster close to ports and big markets, like the Texas Gulf of Mexico near Houston and Corpus Christi. Then it built extensive infrastructure like pipelines to get the product to the refineries. That capital is sunk and industry prefers to maximize what is already in place, rather than build anew.

“Face it, to be able to site an entire industry or entire complex is a challenge. Alberta is fighting against investment that is working in the already captured areas,” Moore said in an interview.

 If the economics don’t work and capital won’t support the necessary investment, then pounding on that square peg with a government hammer is a losing strategy.

But partial upgrading looks like a round peg, potentially a real winner for the Alberta economy.

The School of Public Policy, University of Calgary, released a study last week that suggested the market for fully upgraded bitumen is rapidly closing because of competition from American shale producers, such as the Permian Basin, where production is expected to increase by 1 to 3 million b/d over the next decade, according to Pete Stark, a senior analyst with IHS Markit.

Partial upgrading uses new technology to increase the viscosity of the gooey bitumen, which has the consistency of peanut butter, to a medium or heavy crude oil that flows in pipelines without needing the usual 30 per cent blend of diluent. Authors G. Kent Fellows, Robert Mansell, Ronald Schlenker and Jennifer Winter argue there is actually unmet demand for this grade of crude.

 They estimate that a single 100,000 b/d partial upgrader could increase the value of a bitumen barrel by $10 to $15, a significant improvement when Western Canadian Select is fetching mid to high-30s and WTI is trading in the low-50s.

Expect partial upgrading to figure prominently in the advisory committee’s report.

Another surefire bet to be recommended is petrochemical manufacturing. In Dec, the Alberta government awarded $500 million to two companies under the Petrochemical Diversification Program.

$300 million in royalty credits was granted to a joint venture between Pembina Pipeline Corp. and Kuwait’s Petrochemical Industries Company to build a plant capable of manufacturing 800,000 tonnes a year of polypropylene, which will require 35,000 b/d of propane. A further $200 million in royalty credits was granted to Inter Pipeline for a similar facility.

The government estimates the two new manufacturing operations will create about 1,400 direct and indirect full-time jobs when they open in 2021.

What government wouldn’t double down on its program that appears to be a success?

Expect to see the committee suggest the Petrochemical Diversification Program be extended and perhaps even beefed up to take advantage of new technologies coming on stream in the near future.

“There’s the opportunity to do things you and I haven’t even dreamed of yet in terms of finding value-added products of the hydrocarbons,” says Moore.

“They’re out there and it’s just going to take a fair number of incentives I think that they take advantage of to actually get at them and use them, but I think that’s going to happen.”

But there is another sector of the Alberta oil and gas industry that shouldn’t be ignored: oilfield services and manufacturing, mostly centred in Calgary and Edmonton.

This sector mostly flies beneath the radar, but it is highly innovative and produces products and services that are sold around the world. And it’s changing, according to Mark Salkeld, CEO of the Petroleum Services Assoc. of Canada.

In the past, oil companies developed a lot of the new oilfield technology. Over time, though, that job has migrated to the services and manufacturing sector.

Some of the service companies are a good size, like Trican Well Service Ltd., which supports a research and development centre in Calgary that develops new products, including environmentally-friendly fracking fluids.

Others are smaller operations. The Foothills Industrial Park in southeast Calgary is littered with companies developing home-grown technology to improve efficiency in the oil sands and conventional oil production. Lloydminster is home to entrepreneurs innovating in the cold heavy crude sector.

Aside from a few well-known bigger firms, like Trican, the Alberta oilfield services and manufacturing industry is not very visible. It should be.

Alberta companies could be assisted to develop markets outside their traditional customers in Canada and the United States. For instance, what is the potential in Mexico as the national government reforms the state-owned oil sector and invites in foreign producers and suppliers?

Or, what are the opportunities in related industries, both domestically and internationally?

Possibilities abound for the Alberta energy economy. The Energy Diversification Advisory Committee should leave no stone unturned.

An energy diversification strategy that includes partial upgrading of bitumen, petrochemical development, and expansion of oilfield services and manufacturing could be a powerful vision to promote investment and job creation.