Financial Post – Partial upgrading of oilsands could fetch additional $10-15 per barrel: report

January 6, 2017

CALGARY — A new report suggests that Canada would benefit from higher capacity of so-called “partial upgrading” technology, a process that would help oilsands players fetch a higher price for their product and ease longstanding pipeline woes.

Researchers at the University of Calgary School of Public Policy released a report Thursday saying that — under certain scenarios — the construction of a typical partial upgrader would net billions in returns to private enterprises and government over a 20-year period.

It’s estimated that a 100,000 barrel-per-day facility could generate roughly $1.2 billion in revenues for the Alberta government over the entire period between 2016 and 2035.

Partial upgrading involves chemically breaking down bitumen from its highly viscous natural state so it can flow through a pipeline. Today, about 60 per cent of Alberta’s oilsands production is shipped in its raw form, which requires companies to mix the bitumen with a lubricant known as diluent to mobilize it. The rest is typically upgraded into a more refined product known as synthetic crude oil.

“What we’re saying with this report is ‘look, there’s a middle ground here,’” said Kent Fellows, a researcher associate at the University of Calgary and one of the authors of the report. “You don’t have to all or nothing—it’s not [either] raw bitumen or synthetic crude.”

The demand for diluent is expensive and uses up vital transport capacity on Canada’s congested pipeline system. On average, every barrel of raw bitumen shipped out of Alberta contains roughly 30 per cent condensate.

Canada’s oil pipeline system could soon have additional capacity after Justin Trudeau approved the Trans Mountain and Line 3 pipelines in late 2016. However, with nearly one million barrels per day of oilsands production expected to come online in the next five years, producers could continue to face constraints in the near future.

Analysts estimate that oilsands companies would also receive prices between US$10 and US$15 higher per barrel by using a partial upgrading process. Calgary-based producers have for years received a lower price for their oil compared to competitors, both due to the heavy qualities of oilsands bitumen and a lack of access to overseas markets.

The researchers also argue that there is a strong market for partially upgraded bitumen in the U.S., as synthetic crude sometimes has to compete with the growing glut of light oil production south of the border.

“The market for synthetic crude oil produced by full upgrading is getting tighter and tighter in the U.S.,” Fellows said.

The viability of partial upgrading is part of a broader discussion about how Canada can receive the highest possible returns from its sprawling oilsands reserves.

In the past this has involved the construction of facilities that produce higher value products from heavy oil. Proponents see such developments as a way to create jobs in Canada, though many economists argue the projects are too capital intensive to be viable.

The most notable example was the Sturgeon Refinery commissioned under former Alberta premier Ed Stelmach.

Estimated costs for the refinery ballooned from $5.7 billion when construction began in 2013 to over $8.5 billion—or roughly $170,000 per barrel for the first 50,000 bpd phase of the facility. The estimated date for completion was also pushed back from mid-2016 to September 2017.

By way of comparison the Hi-Q partial upgrading process, currently being developed by Calgary-based Meg Energy Corp., is expected to cost about $3 billion, or roughly $30,000 per barrel per day.

But the steep upfront costs of partial upgrading technology have nonetheless led to snags in its development. In 2012 Suncor Energy Inc. cancelled the construction of its $11.4-billion Voyageur Upgrader, and in 2016 CNOOC suspended plans for an upgrader at its steam-driven Long Lake oilsands lease.

So far, partial upgrading technology has never been commercialized in Alberta. Developing the technology requires immense up-front costs, and investors have broadly cooled to the longer-term returns of oilsands projects.

“If you’re developing a new technology, it’s a risky business,” said Neil Camarta the president and CEO of Calgary-based Field Upgrading. “You have to get it from the lab to commercialization and that’s a huge step and a very expensive and risky step. So the biggest problem is just getting the money.”

Field Upgrading recently completed a ten barrel-per-day test facility in Fort Saskatchewan, Alta., which demonstrated the company’s ability to produce a low-sulphur bunker fuel that could be used to power large seaborne vessels.

The company is now developing a much larger 2,500-bpd facility that Camarta estimates will cost around $75 million.

His technology is significantly different from other technologies being developed in Canada. But he says generally speaking it work toward finding new markets for oilsands producers and unlocking existing pipeline infrastructure.

“If you think about what the oilsands is, it’s a manufacturing business with a number of little steps that take it from the ground to its end point. And if you can make any of those steps cheaper and cleaner it’s going to lift the game.”

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