By November 28, 2017 Read More →

Heavy oil processing, refining investment remains a challenge for Alberta oil sands – IHS study

heavy oil

Alberta oil sands mining operation. Heavy oil processing investment a challenge.

Prospects for upgrading to full synthetic crude remain most challenged, according to IHS

Despite market changes, including some to the benefit of heavy oil processing in recent years, challenges still remain for investing in new heavy oil processing capacity in North America, according to a new study by IHS Markit.

A New Look: Extracting Value from the Canadian Oil Sands, the Oil Sands Dialogue report presents a post-oil price collapse update to a 2013 analysis on the economics of processing heavy oil in Alberta and other select jurisdictions.

The oil market experienced major past and potential pending changes, most notably cost deflation since the 2014 oil price collapse and a pending shift in marine fuel specifications that has the potential to improve the economics of processing heavy oil.

heavy oil

The report says that despite these changes, the abundance of American light, tight oil continues to challenge investments in heavy oil processing in Western Canada.

With growth expected to continue (albeit at a slower pace), the preferred option may continue to be exporting bitumen, rather than investing in heavy oil processing, the report concluded.

The study examines three investment options to process heavy oil—upgraders, refinery conversions and constructing entirely new refineries:

Under the first option, upgrading facilities convert oil sands bitumen into light, synthetic crude oil (known as SCO) that competes for refinery space with light sweet crude from growing U.S. tight oil supply.

The other two options—refinery conversions and new refineries—involve either adapting an existing refinery to process heavier crude oil or building an entirely new heavy oil refinery.

“Public interest remains for heavy oil refining and processing capacity in Western Canada. Though the economic outlook has improved, upgrading continues to look challenged. New refineries could work under the right circumstances, but are not without risk” said Kevin Birn, an IHS Markit executive director who heads the Oil Sands Dialogue.

The prospects for upgrading facilities remain the most challenged, the study says. The other two options—refinery conversions and new refineries—have benefited from recent and anticipated changes in the oil market, which could improve the return in heavy oil processing.

“In order to convert a refinery you need a suitable facility available to be converted, as well as a cost advantage source of heavy crude supply,” Birn said.

Of those two options, refinery conversions remain the most attractive—by far—due to lower capital cost. Yet the abundance of so much light, tight oil will also weigh on any new significant investment in heavy oil processing in North America, the study says.

electric semi-truck

Birn says the “economics for refinery conversions are the most favorable of the three options reviewed in the study. But the abundance of light, tight oil diminishes the incentive for facilities to make that switch.”

Adding to the challenge, refined product demand in North America is expected to gradually decline.

Any new investments in refining capacity in western Canada would likely have to displace incumbents or, more likely, be exported offshore.

“The most attractive option for growing oil sands production continues to look like the export of heavy sour bitumen blends to U.S. Gulf Coast region which imported over 1.8 million b/d of crude oil of similar quality to the oil sands from offshore places like Venezuela, Mexico and others in 2016,” said Patrick Smith, the study’s co-author and research associate at IHS Markit.

Finding a party willing to commit to a mutually agreeable, long-term contract—likely a necessity for obtaining financing for a new export-oriented refining project—may be a stumbling block, the study says.

“But present conditions have oil sands producers searching for new options as well. A key area of interest is what is being call partial upgrading which seeks to improve the mobility of bitumen—reducing the need for diluent used in the creation of bitumen blends—a significant cost for the industry today.”

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