CALGARY – It used to be a foregone conclusion that the gigantic shovel-and-dumptruck operations in the oilsands would go hand-in-hand with an upgrader – a multibillion dollar facility to turn the sticky bitumen squeezed from the sand into lighter oil that refineries can handle more easily.

But some companies – most recently Imperial Oil Ltd. (TSX:IMO) – have opted to go without building one of those expensive complexes.

And the head of Alberta’s labour group warns the move away from the oilsands’ traditional business model means the province’s already grim employment picture won’t brighten when the economy bounces back.
Among other options Imperial is looking at is sending production from its recently approved Kearl project to refineries in the United States, which can been retrofitted to handle heavier crude.

The Alberta Federation of Labour has been urging intervention from the Alberta government to stamp out what is sees as a disturbing trend.
“The same general economic conditions that convinced Imperial to go with an extraction-only project will likely convince other developers to do the same,” said AFL president Gil McGowan in an interview.

“Frankly that should be a big concern for Albertans because what it will mean is that literally thousands of high-paying jobs in upgrading and refining will be shipped down the pipeline to the American Midwest and Gulf Coast.”

A report in March by the AFL showed that there are at least 10 major refinery expansion projects underway in the United States, which will have the combined capacity to upgrade 2.8 million barrels of oilsands crude per day – about the total output expected by 2020.

Currently about two-thirds of the current 1.2 million barrels or so produced each day is upgraded in Alberta, but that is not likely to last long, McGowan said.

“We’re afraid that if the Alberta government especially doesn’t intervene the proportion of bitumen upgraded in the province will actually flip within the next 15 years, and that we’ll see as little as a third upgraded here,” McGowan said.

The two oldest and largest oilsands players – Suncor Energy Inc. (TSX:SU) and Syncrude Canada Ltd. – both have upgraders on site.

The facilities each employ about 4,000 full-time permanent workers, according to the AFL. Thousands more are hired on a temporary basis each year for regular maintenance work.

“When it comes to the oilsands, the real money and the real jobs are in both upgrading and refining,” said McGowan.

Building the upgraders also spurs an enormous amount of short-term construction work in Alberta.

Canadian Natural Resources Ltd.’s (TSX:CNQ) Horizon oilsands project, which includes an on-site upgrader, employed about 7,000 workers during peak construction. By contrast Kearl is estimated to create about 2,000 short-term jobs, McGowan said.

The Alberta government recognizes that the oilsands are seeing a change, said Alberta Energy spokesman Bob McManus.

“Not all projects will be integrated facilities,” he said. “Where it used to be – a la Suncor, Syncrude – that a project consisted of a mine, an upgrader and a pipeline to the refinery, now it might consist of a mine and a pipeline to a merchant upgrader.”

The province, which currently takes its bitumen royalties in cash, is proposing to start collecting what’s called bitumen royalties in-kind. The government would boost the local industry by re-selling the bitumen to upgraders in the province, McManus explained.

Alberta Energy has also been looking at ways to make the province’s main industry more competitive with other jurisdictions – “everything from the regulatory lay of the land to the tax regimes,” McManus said.

Greg Stringham, vice-president for markets and fiscal policy for the Canadian Association of Petroleum Producers, said Alberta companies are looking at upgrading their bitumen in the United States because there is a lot more spare capacity there than at home.

With heavy oil imports from Venezuela and Mexico drying up, refiners along the Gulf Coast and in the Midwest are hungry for feedstock.

“Alberta is set to compete with upgrading capacity that’s empty there and ready to take crude without any construction, versus building an upgrader here in Alberta. And that’s really tough to compete against,” Stringham said.

But Stringham said that situation will be short-lived. Once the spare U.S. capacity fills up again it will make economic sense to build upgraders in Alberta.

“You can integrate it with your refinery or integrate it with the upstream extraction plant so that you’re using the steam, getting the efficiencies on electricity, utilities and water usage. Then you can help mitigate much of that cost.”

Pictou County News, Fri May 29 2009