Reality Check: Profits, Prices, and Access to Markets

Alberta is producing too much of the wrong product; no mystery why oil companies are getting a low price.

The Government of Alberta’s evidence filed with the Joint Review Panel for the Northern Gateway pipeline shows Alberta’s failure to upgrade bitumen is what is causing lower prices for bitumen and what is driving the alleged need for the Northern Gateway pipeline.

The Government of Alberta hired energy consultant firm Wood Mackenzie to do an analysis on the need for “new markets” for Alberta’s bitumen. The analysis is designed to support the Northern Gateway pipeline.

The report is technical in nature.

The GoA evidence says oil sands producers “could” lose up to $8/barrel because bitumen is flooding North American refineries incapable of handling it. Chinese refineries can handle bitumen, and it makes sense for oil sands operators deeply involved with Chinese state-owned oil companies to ship raw bitumen to Chinese refineries, who rely on lower labour and environmental laws.

There is plenty of North American refinery space for synthetic crude oil, which is upgraded bitumen. But the Government of Alberta hasn’t forced companies to build upgraders, and has allowed a stampede of development without any regard for keeping jobs in Alberta.

The Government of Alberta is responsible for the problems they describe in their evidence. We are pulling bitumen – a lower-quality product – out of the ground, shipping it out as fast as we can, flooding the market with a low-quality product, and wondering why we are losing money.

The Wood MacKenzie report before the NEB might be complicated and technical, but the explanation is quite simple. Upgrade the resource before it leaves Alberta, keep the good jobs here, earn more tax and royalty revenues for Albertans, and the economic case for the Northern Gateway pipeline evaporates.

Technical Backgrounder on the Wood MacKenzie Report

Wood MacKenzie’s $8/barrel “discount”

WMK’s $8/barrel discount prediction is a figure based on the concept of “refining value.”

WMK predicts Canadian producers “could continue to lose approximately C$8/bbl relative to its refining value.”[1]

The discount of value is driven by the fuel oil yield in the cracking configuration, which sells at a discount to the gasoline and diesel produced in a coking configuration.

“The Refining Value, which is the value of refined petroleum products produced from a given crude oil, falls as a refinery configuration becomes more ‘simple’ because the simpler configuration has less capability to convert the lower-value heavy end of the crude assay to higher-value products, such as transportation fuels.”[2]

The $8/barrel “discount” is attributable to:

• A glut of supply for coking refineries
• Too much non-upgraded bitumen looking for a home. It is finding its home in cracking refineries, thus simply producing fuel oil rather than diesel or gasoline

Prediction of losses of refining value are further attributable to:

• Not enough pipeline capacity to “premium heavy crude markets,” aka refineries that can process bitumen straight into gasoline or diesel
• Runaway growth in bitumen supply and a glut on the market

The Wood Mackenzie analysis relies on the following assumptions:

• A lack of upgraders in Alberta. If bitumen is upgraded to SCO in greater amounts, higher refining values can be achieved
• A prediction of just 26% of Alberta bitumen being upgraded by 2025, far below the Government of Alberta’s stated policy goal of 2/3 bitumen upgraded in Alberta
• A growth in supply due to ERCB approving every project, without associated upgrading capability
• A total lack of pacing by the GoA Department of Energy
• Ignoring the use of rail entirely, which is not only being used right now but also contained in Enbridge’s analysis

Heavy Crude Refining Predicted to Fall in Western Canada With Northern Gateway

According to Enbridge’s evidence before the National Energy Board, Western Canadian “heavy crude” – aka bitumen coming from the oil sands – will be increasingly refined in China, where state-owned companies are building massive refining complexes capable of handling bitumen.

Western Canada Refinery Throughput[3]	2011 Refinery Throughput – Reported to CAPP	2018 Forecast By Enbridge – With Northern Gateway Pipeline
Conventional Light-Medium	173,000	110,100
Synthetic Sweet	205,000	245,900
Heavy Crude, All Grades	199,000	152,400
Sour Synthetic	N/A	67,500
Total Throughput – Western Canada	577,000	575,900

About the AFL Northern Gateway Reality Check Series

The Alberta Federation of Labour is a full intervener in the Northern Gateway Pipeline.

The debate around the Northern Gateway pipeline is heated, and we hear governments and industry saying all kinds of things to justify locking Canada in to being a raw resource producer, but never move up the value chain with our natural resource wealth.

“The Northern Gateway pipeline hollows out our value-added industries, imposes higher oil prices on consumers, and rewrites the rules of Canada’s oil industry. Gateway will reduce the amount of oil sands upgraded in Alberta and ship thousands of jobs to China,” Gil McGowan, President, Alberta Federation of Labour.