From oil sands to gas pump: Alberta looks to its energy future

As the battle over the Keystone XL pipeline threatens to upset exports from Canada’s oil sands to the United States, an old dream to make Alberta an oil-processing powerhouse is back on the table.

Alberta’s energy industry has long counted on the planned pipeline to carry much of the province’s ever-increasing volume of oil sands output to refineries on the U.S. Gulf Coast.

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Production in the oil sands

But the recent move by the U.S. government to postpone approval of Keystone XL clouds the outlook for the project, and has industry officials, labour unions and politicians asking a key question: Instead of letting Texas turn Alberta’s bitumen into gasoline, diesel, heating oil and jet fuel, why not do it on Canadian soil?

Currently, about 60 per cent of Alberta’s oil sands production is upgraded – turned from bitumen into lighter crude – in the province. That percentage is expected to decline in coming years as oil sands production outweighs the capacity to process it. That’s why TransCanada Corp.’s (TRP-T41.570.972.39%) Keystone XL is so important for the growth of the oil sands industry.

“We believe there is an opportunity to do more upgrading in Alberta,” said Premier Alison Redford this week during a stop in New York. The province wants more processing, but only if operations can stand on their own commercially. “We believe – I believe – that Albertans want that to be done in a way that ensures they are economically viable.”

Proponents of Alberta’s upgrading and refining sector argue the time is now to grab hold of all of the benefits tied to the oil business, transforming the province into a more-rounded energy leader.

“With Keystone, we’ve realized how dependant we are on a single market. It is a wakeup call for us,” said Ian MacGregor, chair of startup North West Upgrading Inc., a company that aims to build an upgrading and refining complex in Alberta. “Someone’s told us that they might not let us do what we want.”

Mr. MacGregor supports Keystone, but believes its struggles demonstrate why local upgraders and refineries are necessary as oil producers try to reach new customers in the U.S. and Asia.

“It is a lot easier to get [to those markets] with refined products than it is with raw materials,” Mr. MacGregor said.

Supporters say the Alberta oil-processing debate reflects the broader shortcomings in Canada’s economy, where raw materials are often shipped to be turned into finished goods elsewhere, and many manufacturing and technology companies struggle to compete on the global stage.

“We should be upgrading to the maximum extent possible within Alberta, within Canada, before we export,” said former Industry minister Jim Prentice, now vice-chairman of Canadian Imperial Bank of Commerce. “We should maximize the value-added that is done in Canada before any of those products leave.”

A CIBC report suggests that over the next two decades, energy infrastructure construction will add a million jobs to the Canadian economy – enough to pull it away from recessionary risk without government intervention. At least part of that depends on Canada processing its oil sands crude.

But even boosters for more upgrading and refining concede that the vision of a vibrant Alberta processing industry faces major economic and practical challenges. Alberta’s dilemma is that upgrading and refining bitumen into light oil, diesel and jet fuel may create jobs and bring more money into the province, but the overall economic case is hard to make. Processing infrastructure costs billions of dollars and takes years to get off the ground. Meanwhile, Gulf Coast upgraders and refineries are ready and able to handle a lot more of Alberta’s oil sands.

Texas refineries can process about 9 million barrels of oil per day, with heavy oil accounting for about 5 million of those barrels. As Texas-bound crude shipments from Mexico and Venezuela shrink, these American refineries – some owned by the same companies with operations in the oil sands – are running under capacity.

When most energy firms do the math, they conclude the path for processing Canada’s oil sands leads to Texas.

Oil companies “can make more money that way,” said Neil Shelly, executive director of Alberta’s Industrial Heartland Association, “So we really don’t fault the companies.”

Alberta aims to boost the current amount of bitumen processed in the province to two-thirds. But the Energy Resources Conservation Board predicts only 47 per cent of Alberta’s bitumen will be processed locally by 2020. Bitumen extraction plans simply outstrip upgrading expansion plans.

A number of proposed Alberta upgraders have permits lined up and just need to get building started. An additional 600,000 barrels of bitumen per day will have to be processed in Alberta by 2020 in order to maintain its upgrading and refining target of two-thirds, Mr. Shelly calculates. Four new upgraders could cover this demand, he said. This would translate to $40-billion in capital investment, and 60,000 people-years of employment during construction, he said. Of those positions, 11,000 would be high-end jobs like engineering. The additional capacity would mean 6,000 permanent jobs.

Still, because refineries produce a varied slate of products – everything from fuels to chemical feedstocks and asphalt – the local market is too small to absorb the output of more than a couple refineries, said Pedro Antunes, an analyst with the Conference Board of Canada, who recently wrote a report on Canada’s refining sector.

“You end up with 15 products [from the refinery] and you need the infrastructure to ship everything and it becomes difficult to deal with,” Mr. Antunes said. “You are kind of landlocked with all that slate of products that you need to get out and it is more expensive.”

From oil sands to gas pump: Alberta looks to its energy future

carrie tait , shawn mccarthy AND nathan vanderklippeC

ALGARY, OTTAWA AND CALGARY— From Saturday's Globe and Mail

Published Friday, Nov. 18, 2011 7:34PM EST