Friday, September 21, 2012

Why more bitumen isn't upgraded in Alberta

A refinery in Strathcona, outside Edmonton.
From Wikipedia, so it's not even real stealing this time.

Alberta Oil Magazine has an interesting article about why it doesn't make much sense to build bitumen upgraders in Alberta, and why that's not necessarily a bad thing. To summarize, upgrading margins have been consistently thin because the light and heavy oil price differential is so small, and plants can be built on the US gulf coast for half as much, a figure I think is pretty staggering. Cost overruns are frequent and large, particularly when the industry tries to do many "mega-projects" at once because qualified labour gets rarer and more expensive.

As for why upgrading outside Alberta is not necessarily a bad thing, the argument the author makes is essentially one of comparative advantage. The workers needed to make a 100,000 barrel per day refinery could be used to make 300,000 barrels per day of oil sands projects. Any construction workers put on refinery duty will be taken off of extraction duty, particularly in a labour market as stretched as Alberta's. And finally, shale oil from places like the Bakken in North Dakota is competing with upgraded bitumen, driving down the margins of refining. Because these margins are so much thinner than extraction, and because royalties are not applied to upgrading, Alberta makes much more money focussing its capital and labour on oil sands extraction rather than upgrading.

All this of course flies in the face of conventional wisdom, including the party positions of the Liberals and NDP. I thought it was a very interesting article and well worth the read.


  1. why is it half the price to build the refinery in the gulf? just because of the price of labour?

    1. I don't know where the article got that number from. I would think labour accounted for a lot of the difference, particularly during construction, but the main factor is probably that there are already many huge refineries on the gulf coast and expanding existing ones is a lot cheaper than building new ones, like would have to be done here.

      On further thought about this issue, I'm not so sure I'm as onside with this idea as I appear to be above. The best way to maximize profit in the medium term might well be to focus on extraction. But if you put off building a 300,000 barrel per day mine to make a 100,000 barrel per day refinery it's not like you're losing the value of that mine - the bitumen is still there. If we decline to upgrade oil in Alberta, however, it seems to me that there's a value that's gone for good. In other words, we have a set amount of bitumen to extract. In the long run, we can either sell it at unrefined prices or refined prices. If the time value of money is ignored, clearly we would maximize the profit from ALL the oilsands in Alberta by upgrading it here, but that's likely to be a period of hundreds of years and we can't ignore the time value of money. For all we know in 100 years oil could be worthless and we'd be left with a bunch of worthless bitumen in the ground that we should have sold when the getting was good.

      Anyway, I'm torn on this issue and at the end of the day I think a middle ground would be best - some requirements forcing companies to develop their Albertan refining capacity, but not letting those requirements force companies to do things that don't make any sense for them economically.