Strathcona County's victims of the credit crisis
Carrie Tait, Financial Post
Published: Friday, November 21, 2008
Cathy Olesen is counting on her fingers. She is the Mayor of Strathcona County, part of an area that as recently as six months ago was slated to host as much as $90-billion worth of heavy oil upgrader projects -- giant masses of rust-coloured steel that transform heavy oil into synthetic crude, getting it one step closer to petroleum products such as gasoline. At least seven projects had been penciled in, each of them promising millions in economic spin-offs.
But rather than count projects to come, she is counting casualties, victims of the credit crisis, slumping energy prices, and regulatory uncertainty: BA Energy Inc., Total SA and Petro-Canada to name three, all of which have recently announced delays. More names are right on the tip of her tongue.
Instead of a crop of upgraders sprouting up in the empty fields northeast of Edmonton -- a swath of 78,550 acres zoned for heavy industrial activity branded as Alberta's Industrial Heartland -- bitumen squeezed out of the province's oil sands may bypass this rural area and head via pipeline to the refineries in the U.S. Gulf Coast. Jobs, coattail industries, and federal, provincial and municipal tax dollars will follow the black goo south.
"If the pipelines are built, and it's getting shipped south, it's gone; there's no chance to build an upgrader," Ms. Olesen, 47, says. "Once it's gone, it's gone. Many of these could be gone forever."
As Ms. Olesen and neighbouring mayors worry about losing long-term, mega-industrial projects to the United States, Alberta's Energy Minister, Mel Knight, calmly sits at a small oval table in his office in the Legislature. He oozes confidence that Ms. Olesen's concerns are exaggerated.
"I don't look at any of these things as cancelled," he says, tapping the table with his finger for emphasis. "Sure, there's deferrals, most certainly companies will talk about situations where they are not able to proceed at this time, but my absolute conviction with respect to this issue is that Alberta's bitumen is a very, very good product and can be an excellent source of transportation fuel.... This commodity and this resource for Albertans is absolutely as good as you get anywhere in the world.
"We can compete," he said. "This situation, in my opinion, will rectify itself."
Mr Knight's optimistic outlook came on Tuesday, the day after Petro-Canada announced it was deferring its upgrader in the Industrial Heartland, and the same day the government sliced $6.5-billion off its surplus projection.
A day later, his government backed off some of the changes to its new royalty structure, arguing new shale gas discoveries in Texas and Louisiana are hurting the province's natural gas industry and that the credit crisis is hampering companies needing cash to drill for oil and gas, all putting local jobs at risk.
The province hopes to eventually upgrade about 75% of the heavy crude it produces, up from between 60% and 65% today. Upgraders turn heavy oil into synthetic crude, a necessary step before it can be further processed at refineries into products like gasoline, jet fuel, diesel and propane. Alberta currently produces about 1.6-million barrels of bitumen and heavy oil per day, and about a million barrels of that are upgraded in the province, according to the Canadian Association of Petroleum Producers. The rest is exported, and further exportation plans are in the works.
Don Rigney, Mayor of Sturgeon County, most of which lies within the Industrial Heartland, paints a scenario that assumes increased production and increased exports. He notes that should Canada export 1.5-million barrels per day of heavy oil, the take in royalties and taxes would be between $3-billion and $4-billion a year. If the same amount is upgraded domestically, the take jumps to between $10-billion and $11-billion a year, according to Mr. Rigney's calculations, which assume an oil price of US$80 per barrel and a price differential of 30% between a barrel of bitumen and a barrel of oil, along with other variables.
When heavy oil is upgraded in Canada, about 60% to 65% of the tax dollars go to the federal government, 30% to 35% to Alberta, and about 5% to the local municipalities, Mr. Rigney said. But when bitumen is shipped raw, the federal government's take drops to about 55%, the province's to 40%, while the municipalities hang on to their 5%.
"That's real money," he says. "They are only going to wake up when they start to run a deficit."
Alberta's Industrial Heartland, which would experience the most direct benefit should the upgraders go ahead, was formed about 10 years ago and covers parts of the counties of Lamont, Strathcona, Sturgeon, and the city of Fort Saskatchewan. It is aleady dotted with facilities such as Agrium Inc.'s fertilizer operation and accompanying gypsum pile, and the petrochemical operation belonging to Dow Chemical Canada Inc. Giant chimneys pumping white vapor into the atmosphere can be spotted all over the Heartland.
Shell Canada's Scotford refinery and upgrading complex in Strathcona County is the crown jewel of the region. Expansion on the upgrader is underway, but phases two, three, four, five, six and seven have been postponed.
On the other side of the North Saskatchewan River, which cuts through the area, a lone coyote ambles across a gravel road on the property of Calgary-based North West Upgrading Inc., which has halted prep work for a merchant upgrader.
Petro-Canada's territory sits next door, again, home to very little. Unoccupied houses sit on skids in the Industrial Heartland ready to be hauled away.
Fort McMurray, about 400 kilometers to the north, has been hit with similar delays -- Suncor Energy Inc., for example, recently pulled back on spending that will affect its upgrader expansion aspirations. Canadian Natural Resources Ltd. is on the verge of finishing the first phase of its Horizon oil sands project, which comes with a new upgrader up in Fort McMurray. But future phases are on hold.
For the oil industry, it all comes down to simple math.
"If you build the exact same plant in Texas versus Alberta, there probably could be a [cost] difference as much as one-and-a-half to two times more," Real Cusson, Canadian Natural Resources Ltd.'s senior vice-president of marketing, said in Calgary this month. It costs between $20,000 and $25,000 per barrel of capacity to tweak an existing refinery in the U.S. Gulf Coast to handle Canada's heaviest crude, Mr. Cusson said. To upgrade in Alberta, where ancillary costs are higher, is more like $40,000 per barrel of capacity.
Mr. Knight argues the province has plenty of ways to stay in the game.
"We know we have the capability to produce something in the neigbourhood of... four or five millions of barrels of bitumen production at some future point," he says. "And that four or five million barrels certainly doesn't have [pipeline] capacity built for it now, nor do we see that happening in the short-term."
Further, the new royalty framework has a bitumen royalty-in-kind clause, which could encourage upgrading in the province. Within a decade or so, depending on deliveries and commodity prices, the Alberta government would receive between 25% to 30% of bitumen production in kind.
"When you start thinking of the opportunities there to do a piece of business with people that are producers in the province of Alberta, I think there is tremendous opportunities to get to the targets we have set for ourselves," Mr. Knight says, referencing Alberta's goal of upgrading 75% of domestic production.
Upgrading companies need comfort that there will be a sufficient supply of bitumen in the future to justify building now. Should provincial contracts emerge, as Mr. Knight hints, local players such as North West may be able to forge ahead.
Escalating economic problems south of the border also bode well for Alberta.
"They will have experienced, probably earlier and very likely deeper, economic negative aspects that we have in Alberta," Mr. Knight says. "I'm not so sure all the things that have been announced in the United States will move ahead either."
None of this comforts Ms. Olesen and Mr. Rigney. "We're on the cusp of a potential great loss that can never be recovered," she says.
Mr. Rigney, his voice sagging just a touch, agrees: "Never be recovered."
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Interesting article, however, keep note of the word 'delay, delayed, postponed'. As I've said before, there was no way we could sustainably construct these without major implications on our economy - hyper-inflated prices for materials, labour, infrastructure, etc.
Now is the time for the government to review what has occurred in Alberta over the past decade. What economic, environmental and social measures, programs, policies or laws should be enacted to deal with the next 'boom'? Now is the time to plan, not react when it arrives.
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