Expression of interest approach could encourage applicants to propose innovative ideas, like the new “crude oil to petrochemicals” technology used in China
Premier Rachel Notley says she wants to build a new refinery (or expand an existing one) in Alberta. At first blush, extracting more value from bitumen sounds like a great idea. But studies in the past few years concluded building new refining capacity in the province faces strong headwinds.
Perhaps because of those headwinds, the government is a bit vague on exactly what it is asking for.
The refinery can be “in Alberta or tied to Alberta production.” Does that include one of the several refinery projects – such as Pacific Energy Future, which wants to ship bitumen by rail – being proposed for the West Coast? Would purchasing an existing American refinery and converting it to process bitumen qualify? What about expansion of US refineries owned by Alberta-based oil sands companies like Suncor or Husky?
When the Premier said Tuesday that it’s “time to grab the bull by the horns and to do more refining and upgrading [emphasis added] that adds value and creates jobs here,” did she mean upgrading bitumen to synthetic crude like the Husky upgrader in Lloydminster? If so, then that crude would compete in Northern American markets already drowning in light crude from the ever prolific US shale basins.
David Chappell, chair of the Resource Diversification Council, in the government’s press release talked about Alberta competing internationally for “large industrial value-add energy investments,” which appears to leave the door open for the new “crude oil to petrochemicals” technology like the massive 400,000 b/d Hengli refinery and petrochemical complex located in northeastern China.
RJ Chang, head of the process economic program for IHS MarkIt, says making petrochemicals from crude oil in only one step (older complexes required a more costly two-step process) is only two to three years old and usually uses light crude, but the Chinese have discovered how to do it with the cheaper heavy crude that Canada produces.
“In China, they actually use heavy crude. They change the configuration of the whole refinery to produce the maximum amount of petrochemicals. Some of the projects can convert around 45% per barrel of oil to petrochemicals,” compared to five per cent to 20 per cent for lighter oils, he told Energi News.
Crude oil to petrochemicals might make more sense for this project because gasoline consumption is declining in N.A. and Europe, according to Ed Rawle of Wood Mackenzie, author of a recent study that predicts peak oil demand will arrive in 2036.
“Gasoline is the hardest hit fuel. We have China peaking in 2030 and we have it declining much, much sooner than that in a number of Western economies,” he said in an interview.
“For example, the US has already peaked or will between now and 2020.”
The gasoline trend – with diesel right behind it, according to Rawle – is one of the reasons by IHS MarkIt concluded in a 2017 study that both new upgrading and new refining investments in Alberta would struggle to be economic.
“Though the outlook has improved,” Birn said in a press release, “upgrading continues to look challenged. New refineries could work under the right circumstances, but are not without risk.”
In fact, Birn’s group released a new study Tuesday showing that demand for Alberta bitumen has grown steadily and will continue to grow for the forseeable future thanks to declining production in Venzuela and Mexico combined with Russia’s decision to domestically process more than 300,000 b/d of heavy crude rather than export to Europe, which now must find other supplies in a rapidly tightening market.
“The relative importance of Canadian heavy oil to the US market has increased and will continue to do so,” said Birn.
The reason growing US Gulf Coast demand hasn’t translated into higher prices is the shortage of pipeline capacity, as every Albertan – and most Canadians – is now well aware.
Within this complex and rapidly evolving scenario, the Alberta government has configured its expression of interest to allow the maximum degree of flexibility, encouraging proponents to be as innovative as possible says Gil McGowan, head of the Alberta Federation of Labour and appointed by Notley to co-chair the Energy Diversification Advisory Committee, whose report was release earlier this year.
“With this approach, we might get proposals for a traditional refinery or we get proposals for more cutting-edge ideas, like building a facility to turn bitumen into petrochemicals,” he said in an interview.
“Opening the door to a wider range of options is better for Albertans, the owners of the resource, because more options will be available to add value and create jobs.”
The Notley government accepted most of EDAC’s recommendations, creating a $1 billion program to speed up the commercialization of partial upgrading (bitumen to heavy or medium crude) and another billion to support petrochemical expansion. The partial upgrading subsidies received another billion from the government several weeks ago in the midst of the public furor over the steep drop in Canadian oil prices.
McGowan, an advisor to Notley, argues that the refinery expression of interest should be viewed as part of the Premier’s strategy to process more bitumen in Alberta, thereby providing more certainty for upstream producers and more good paying jobs to replace some of those lost during the recent recession.
When I interviewed her in September for my upcoming book on Alberta energy policies, I asked her to what extent she saw downstream diversification as offsetting the job losses and declining investment the oil sands and other parts of the industry.
“To a very great degree and we are very seized on that and you’re going to hear more on that soon,” she replied.
Well, now Alberta has heard and it appears from hints dropped by Notley that more may be on its way in the near future.
UCP leader Jason Kenney called it a “non-announcement” and UCP MLA Drew Barnes in a press release called it “the latest ploy from a tired, broke, and increasingly desperate government quickly approaching the 2019 election.”
It’s hard to view issuing a formal request for expression of interest by the Alberta government as a non-announcement. Proponents have until Feb. 8 to submit their proposal.
What is clear today is that the Notley government has a well develped plan to significantly expand the value-added processing of Alberta’s raw oil and gas resources, something much talked about in the past, but with indifferent results.
Meanwhile, the UCP has proposed no alternatives except an “energy war room” so the government can snipe at pipeline opponents on social media and a promise to use taxpayer dollars to help fund litigation against those same environmental groups.
There is no plan except to dismantle the Notley energy policies, like the Carbon Competitiveness Incentive Regulations for large emitters that is strongly supported by oil sands producers.
The ball is squarely in your court, Mr. Kenney. Alberta voters want to see your alternatives.
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