Protracted controversy over the proposed Northern Gateway and Keystone XL pipelines have re-ignited arguments about whether Alberta should be refining its own oil rather than shipping it raw to other countries.
Suncor’s Upgrading operations process bitumen into higher-value synthetic crude oil and diesel fuel.
In its eloquent article on the subject, Canadian law firm Gowlings looks at the two schools of thought in the debate. One side, which Gowlings dubs the “Alberta Upgrading Advantage,” starts from the principle that since processing adds value to raw materials and creates and secures skilled jobs, this work should be retained in Alberta wherever possible. The “free market” camp on the other hand argues that new Alberta upgraders are not needed as there’s plenty of existing capacity in the United States, already situated near large energy markets. Therefore, building new upgraders ties up capital that could be more lucratively deployed elsewhere.
The debate hangs on the fact that oil sands development produces bitumen, a tar-like substance much thicker than even heavy crude oil, which refineries cannot process until it has been upgraded. Using a lot of heat and sometimes hydrogen, bitumen is converted into lighter fractions and stripped of excess acid and sulphur. The result is synthetic crude oil which refineries can distill into useful products such as heating oil, gasoline, jet fuel and lubricants.
Historically, Alberta’s upgraders have been integrated with existing oil sands mining or in situ operations. Suncor, for example, operates two integrated plants in Fort McMurray and a third facility, jointly owned with Total E&P Canada, is completing engingeering and preparing for construction.
Upgraders are extremely complex and expensive. A single upgrader is massive and typically costs several billions of dollars to construct.
The provincial government has planted a foot in the Alberta Upgrading Advantage camp. They’ve launched an initiative called Bitumen Royalty in Kind (BRIK), in which Suncor and other bitumen producers would pay royalties in, you guessed it - bitumen - instead of cold, hard cash. Under the program, bitumen provided as royalty becomes Crown-owned and must be upgraded in Alberta. BRIK has triggered plans by North West Upgrading to construct a new merchant upgrader near Redwater, Alberta.
Whether there will be more bitumen upgrading in Alberta or new pipelines that will result in most of the upgrading happening elsewhere, only time will tell. A lot depends on economics, government policy and the business strategies of the oil sands developers. Nevertheless, the current debate about upgrading is healthy as it has engaged well-informed participants and will hopefully result in the best solutions possible.
