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Opinion: Partial bitumen upgrading could boost Alberta's economy

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G. Kent Fellows, Robert Mansell and Jen Winter

Politicians often speak of the need to “add value” to our oilsands bitumen. They advocate upgrading it here to create jobs in Alberta. Upgrading is the process by which very viscous raw bitumen is processed into a lighter “synthetic crude oil.”

Bitumen gets diluted for it to flow via pipeline, requiring the use of an expensive diluting agent like condensate or very light crude oil. Refining bitumen into finished products like gasoline and diesel fuel requires more complex and more expensive processes relative to lighter crude oils. While the higher value for synthetic crude is an argument for full upgrading, one must recognize the costs of this. Unfortunately, those costs are higher than the gain in value. As such, investment in new upgraders is not currently commercially viable. Suncor cancelled its Voyageur upgrader in 2012 and, in 2016, CNOOC suspended its upgrader at the Long Lake in situ project. The only one under construction is the Northwest Sturgeon Upgrader, which has required substantial underwriting by the Alberta government, and the market for fully upgraded crude oil is only getting tougher with competition from rapidly expanding light U.S. shale oil.

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Does this dash the Alberta dream of increased domestic processing? Perhaps not. Emerging partial upgrading technologies could not only be economically viable in the province, but also generate substantial gains in employment, labour income, exports and government revenue. 

Partial upgrading brings bitumen to something resembling a medium or heavy crude, and at a lower cost per barrel than full upgrading. The Alberta Royalty Review Advisory Panel recognized gaps in several North American refineries that could be filled by this partially upgraded Alberta oil.

A partial upgrader serving that less-competitive market not only appears to hold the potential for investors to make attractive returns in the long term, it would also provide important benefits to Alberta.

First, since partially upgraded crude can be shipped via pipeline without diluent (the product used as a diluting agent), producing it in Alberta would free up pipeline capacity. Diluent also sells for a high price in Alberta but a lower price in export markets, so it makes sense to avoid sending it out of province whenever possible.

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Second, the value of each barrel produced would be higher, benefiting oil producers. This also means higher royalty payments to the province.

Finally, partial upgrading also promises lower emissions.

Based on the model of a single 100,000-barrel-a-day partial upgrader, the value increase could be $10 to $15 per barrel. Meanwhile, there could be an average annual increase to Alberta’s GDP of $505 million. Taxable earnings would increase provincial revenues by an average of $60 million a year.

While the idea is promising on paper and in small pilot testing, to demonstrate viability and get commercial funding there is still need to build and operate a larger pilot facility. This is a high-risk investment and represents the ‘death valley’ often observed in Canada where there is a shortage of risk capital to move technologies from the lab and small scale testing to commercial scale. The Alberta government has stepped in to help technologies cross that “death valley” before, for example, the “Underground Test Facility” used to foster the development of in situ mining techniques.

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Adding value to something is only a winning strategy if the value added exceeds the costs incurred. With partial upgrading we may have a value-added solution where the benefits actually outweigh the costs.

As stewards of Alberta’s oilsands, the provincial government has a responsibility to take partial upgrading seriously. Recognizing its potential in the recent royalty review is a good first step, but the question of how to move this technology to a commercially viable scale is a problem that is worth finding a solution to.

Kent Fellows is a research associate, Robert Mansell is academic director and Jen Winter is scientific director of energy and environment — all at The School of Public Policy at the University of Calgary

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