Posted:, 10 December 10, 2018.

Alarm bells are sounding in Alberta with the collapse in oil prices. Bitumen especially has hit rock bottom. Producers are pressing anew for faster action on expansion of export pipelines. Last week, Premier Rachel Notley announced a short-term production cut to ease the glut.

Overlooked are the problems with bitumen itself.

Bitumen from the oilsands is heavy like tar, high in sulphur and contaminants. It is costly to extract, upgrade and refine. Since it is viscous like molasses, it must be diluted with light crude or condensate before it can flow by pipeline or rail car. The diluent itself is an added cost. As well, bitumen is a devil to clean up, hence the environmental concerns about the effects of spills and increased tanker traffic.

Although 40 per cent of the bitumen is upgraded in Alberta and shipped as synthetic crude to refineries in Canada and the U.S., the other 60 per cent is exported to specialized refineries in the United States for final processing. Refineries in Eastern Canada lack the multi-billion-dollar equipment necessary to upgrade bitumen before refining. So do refineries in Asia and Europe. Why would they invest in this equipment when lighter crude is abundant on world markets?

Furthermore, the oilsands contribute alarmingly to global warming. According to Environment and Climate Change Canada, the oilsands already contribute 26 per cent of Canada’s greenhouse emissions, more than petroleum’s use in transportation. Ottawa claims we can have our cake and eat it too — oil-sands expansion can be balanced with environmental concerns.

To expand the oilsands and meet Canada’s Paris Agreement targets, every other sector would have to cut emissions to less than zero by 2050. That’s the finding of a recent report from the Canadian Centre for Policy Alternatives, an outcome that is both physically impossible and politically unacceptable. Asian and European countries would face similar conflict with their emissions targets if they were to import bitumen from Canada. European groups strongly protested against such imports, noting natural gas and light crude are less carbon-intensive.

Market realities have changed since pipelines were first planned. To be profitable, the oilsands need high oil prices. In the early 2000s, when world prices rose above $100 per barrel (U.S.), companies flocked to the oilsands, with strong governmental support. Prime Minister Harper declared Canada an energy superpower. The expansion coincided with the American fracking boom, turning the U.S. into the world’s largest oil producer.

The increase from both countries swamped the world market like a tsunami. With Middle Eastern countries unwilling to reduce their own outputs, world oil prices collapsed. Though prices have partially recovered, the world remains awash in oil. International companies have been divesting from Canada’s oilsands and investing in lower-cost oil elsewhere. Canadian-based firms remain entrenched, but oilsands operations have failed to generate expected profits.

The short-term situation has become untenable. The benchmark price for diluted bitumen, Western Canadian Select, fell below U.S.$14 per barrel this month. The wellhead netback for undiluted bitumen, though proprietary to each company, will be several dollars less, approaching or below costs of production. The short-term will be alleviated when U.S. refineries complete major maintenance programs and new rail cars become available.

The longer-term is threatened, too. The primary market for bitumen is not overseas but U.S. refineries with the specialized equipment to upgrade and refine it. Of 17 tankers loaded at Burnaby in 2016, only one cargo went to Asia. Yet, the terminal was under-utilized. How solid are the forecasts for the Asian market? Political reasons for its promotion are obvious, but its success depends on economics.

To facilitate exports, the Alberta government plans to provide financing for new investments to upgrade bitumen within the province. One such plant is proposed by a Chinese company partnering with Alberta First Nations. The value added would be revenue and jobs for Canada. But the emissions would stay in Canada too, making it even harder to reach Canada’s Paris targets.

Problems also surround the cancelled Energy East pipeline, designed to carry bitumen across Canada to the east coast. The Montreal refinery already receives Western light crude via Enbridge’s Line 9 through Ontario/Quebec. The three refineries farther east — at Quebec City; St John, N.B., and Come-by-Chance, NL — import crude oil. Why don’t they switch to Western Canadian oil? First, they can buy light crude more cheaply from the U.S. and overseas than from Western Canada. Second, they lack the expensive equipment to upgrade bitumen. Third, Western producers can sell bitumen to U.S. refineries, which do have upgrading equipment. The one exception is Come-by-Chance, which processes some oil from offshore Newfoundland.

Switching from imported to domestic crude is difficult because oil trade within North America takes place in an open market. Eastern refiners import much of their crude oil from the United States, and export much of their refined products to the U.S. market. Insisting that Eastern refineries accept domestic crude reeks of economic protectionism. If it became official policy, who would bear the investment cost for building the pipeline and upgrading the bitumen — producers, pipeline operator, refiners, or taxpayers?

For the foreseeable future, the two ongoing pipeline projects to the United States (Enbridge’s Line 3 and TransCanada’s Keystone XL), supplemented by rail transportation, offer enough capacity to transport bitumen to specialized refineries. That said, Keystone is delayed by new US court cases, one challenging the pipeline route in Nebraska, and the other ruling the federal government had provided insufficient grounds for reversing President Obama’s pipeline veto.

Links between oil and politics are well-established. Canadian taxpayers now own the Trans Mountain Expansion. Energy East was cancelled, but various politicians muse about re-instating it. Given the nature of bitumen, both projects may be good for political ribbon-cutting before becoming white elephants.

John Foster is an international oil economist and author of Oil and World Politics: The real story of today’s conflict zones – Iraq, Afghanistan, Venezuela, Ukraine and more (Lorimer, Sep 2018).

943 words excl. heading and bio.

Posted:, 10 December 10, 2018.