Those of us watching the debate over Keystone XL and other proposed pipelines emanating from the oilsands have noted a turn in the rhetoric lately. Since oil pipelines per se are nothing new, opponents such as the Natural Resources Defense Council have specifically targeted the fact they will transport bitumen—heavy crude oil loaded with contaminants—rather than lighter crude. Bitumen, they argue, is more corrosive on the pipes, making the line more leak-prone, and more damaging to the environment when it does spill out, which it inevitably will.
I’ll leave it for others to judge the merits of this argument, but assuming it gains traction with regulators and policymakers—it was aired recently in Congressional hearings over Keystone XL—it could actually be a good thing, long term, for Canada. It doesn’t stop Canada from exporting oilsands crude to the U.S. or anywhere else. It just means we have to upgrade it into synthetic crude first, which would spur investment and job creation in Canada. With synthetic crude right now commanding a US$14-a-barrel premium over West Texas Intermediate, the benchmark crude, it may make economic sense too.
For most of the oilsands’ history, upgrading was part of the package. You build a mine, you build an upgrader, which turns bitumen into the equivalent of light, sweet crude ready for the refinery. But the growth of in situ (underground) oilsands production since 1986, which now constitutes 40% of overall output and will likely surpass mining in the next decade, created a lot of smaller drill-pad operations that didn’t warrant their own multibillion-dollar upgrader. Then during Alberta’s boom years from 2005 to 2008, the cost of building and staffing anything in the province soared. The pipeline companies proposed a solution: pipe raw bitumen to the U.S., in particular the Gulf Coast, where there were already underused refineries designed to process heavy oil from Venezuela. The big in situ producers (Cenovus, Husky, Imperial Oil) jumped at the opportunity. Imperial even decided to hold off building an upgrader at its Kearl mine, now under construction.
Skip forward to today, and the share of bitumen upgraded in Alberta is down to around 60% and falling. Of nine plants once proposed for “Upgrader Alley” northeast of Edmonton, six have been shelved, likely permanently. The Alberta government, meanwhile, has been fighting a losing battle to keep upgrader jobs in the province with its BRIK (Bitumen Royalty in Kind) program, whereby it accepts bitumen from producers in lieu of cash royalties and has signed a supply agreement with a “merchant” refiner (without production of its own) to build an upgrader to process it.
Environmentalists in the U.S., however, might just accomplish what Alberta has failed to do: get companies to invest in Canadian upgraders once again. The longer Keystone XL and other pipelines get delayed, the less likely producers will be willing to accept the discounted prices for bitumen pooling up in the U.S. Midwest and Oklahoma, where the pipelines from Canada currently end. They’ll be looking to upgrade it here, and ship oil no more toxic or corrosive than what’s been crossing the continent for decades across the border.