Hey, Joe, convince Jason there are better ways to ship oil than pipelines

For someone who continually touts Alberta innovation, Kenney can’t seem to think outside the pipe(line)

Senator Joe Manchin was in Alberta this week, hobnobbing with Premier Jason Kenney. Both politicians predictably pimped for higher oil exports to the United States, but with the Keystone XL pipeline off the table, neither could explain how to make that happen.

Before we address the “how,” let’s tackle the more contentious issue of “should.”

Should Alberta export more bitumen?

The easy answer is that the world is facing a climate crisis, oil sands ultra heavy crude is one of the most emission-intense oils on the planet, and cutting back supply not increasing it is the most responsible course of action. This argument butts up against some hard truths.

The Trudeau government says it will not mandate production cuts. Two weeks ago, Alberta Environment Minister Jason Nixon claimed otherwise, but closer inspection revealed that the minister can’t work a simple calculator. “Informed public debates cannot happen when fundamental facts are entirely mischaracterized by public officials,” his federal counterpart, Steven Guilbeault, wrote him in a letter, according to CBC.

Guilbeault also noted that Canadian oil production might grow by a million barrels per day (up from 5 million per day) by 2030 and that the Liberals’ emissions reduction plan (which includes a hard oil and gas emissions cap) would ensure that greenhouse gases fell. International consultancy IHS MarkIt forecasts oil sands production alone will grow by 650,000 barrels per day during that time.

Source: Canada’s Energy Future Report 2020, Canadian Energy Regulator.

One reason oil sands output will rise is that Mexico announced a few months ago that 600,000 barrels per day of Maya heavy exports to US Gulf Coast refineries will stop in 2024.

The global heavy crude market of 10.5 million barrels per days is already tight because Venezuela production, a direct competitor of Alberta, fell from 2.4 billion barrels per day to 700,000 barrels per days thanks to American sanctions.

With no political appetite to restrict demand in the United States or supply in Canada, despite years of trying by environmental groups, higher bitumen exports are a certainty.

But with electric and hydrogen-fuelled transportation growing rapidly and global peak oil demand only a decade away according to the IEA, building more pipelines seems foolhardy. Beside, TC Energy said it has no interest in reviving KXL.

What is a province to do? Well, there are several alternatives to pipelines.

Partial upgrading frees up space on existing pipelines

Bitumen is thick, like peanut butter, and won’t flow without the addition of diluent, which makes up about 30 per cent of the volume in a pipeline. When you’re shipping close to 2 million barrels per day of raw, non-upgraded bitumen, that’s a lot of space taken up by a product with no value, maybe 600,000 barrels per day on the high end. The smart move would be to upgrade it to a medium or heavy grade that required no diluent.

That’s called partial upgrading and it was all the rage within the industry during the NDP government. In fact, the NDP created a $2 billion partial upgrading technology program to encourage commercializing the homegrown technology. A few months after forming government in 2019, Kenney cancelled the program.

Today, Calgary-based Fractal Energy, the only player left in the field, processes 54,0000 barrels per day. The company claims its Jet Shear Technology adds $14 of value to a barrel of crude and reduces GHGs by 11 per cent. What’s not to like?

Perhaps, instead of obsessing over KXL, which has already cost Alberta taxpayers $1.5 billion because of the Premier’s rash investment, the UCP could dust off the partial upgrading program? Instead of throwing good public money after bad, the government could do something practical to boost exports.

DRUbit by rail competitive with pipelines?

Gibson Energy’s diluent recovery unit at Hardisty, west of Edmonton, removes the diluent from 50,000 barrels per day of diluted bitumen, which is then loaded onto special “unit trains” of 104 rail cars for shipment to the US Gulf Coast. The company claims DRUbit is competitive with shipping by pipeline.

The economics work because a third of the rail car isn’t full of a hydrocarbon that normally needs to be shipped back to Alberta (at great expense) once removed from dilbit by American refineries. Taking diluent out much closer to home means Gibson and its US partner can fetch a decent price by shipping it back to oil sands customers. As a bonus, DRUbit is safer to ship (much lower fire hazard), which means lower freight rates.

Crude-by-rail shipments peaked in 2020 at 400,000 barrels per day and today are 100,000 per day. The difference is roughly half the capacity of the Trans Mountain Expansion pipeline, now scheduled to be completed late next year.

How much of existing crude-by-rail capacity could be DRUbit? If DRUbit production was scaled up, could crude-by-rail capacity significantly exceed 400,000 barrels per day?

A prudent Alberta government might want to find answers to those questions.

Joe, call Jason asap

Efforts by environmental groups to curtail oil production over the past 20 years have failed. Consequently, for the next few decades, until electric transportation destroys demand, oil is a necessary evil. There is no point pretending that Canada will not increase oil extraction to supply American demand. But, since peak oil demand (and subsequent demand decline) is imminent, building 50 to 75-year infrastructure like pipelines makes no political or economic sense.

The two technologies described in this column do make sense. There appears to be a strong business case for both. And they appear to be mature enough to scale up in the short-term. If Senator Manchin wants to support more Alberta oil for American markets, he should persuade Premier Kenney to abandon his pipeline obsession and look to alternatives like partial upgrading and DRUbit.

For someone who continually touts Alberta innovation, Kenney can’t seem to think outside the pipe. Perhaps a gentle prod from his new Congressional BFF might stimulate a new idea or two.

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