Refiners Invest Just as Oil Majors Cut Back

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Trying to read the Rune’s on the future oil market must be a tough proposition for North American oil refiners. They not only have to predict the direction of oil prices and of likely demand but also second guess the pace and direction of environmental legislation impacting their industry. That may seem like a no-brainer. It will get tougher you would say, but at the same time that President Obama is making pro environmental noises ultimately ineffective, at the failed Copenhagen summit his administration had already approved a 1000 mile pipeline to carry up to 800,000 barrels a day of oil from Canada’s oil sands deposits to American refineries. The project, likely to cost some USD 2bn, has faced tough opposition from environmental groups keen to keep Athabasca oil sands crude out of the US.

Meanwhile the refineries are making massive investments to accommodate the heavy high bitumen and sulfur containing crude from the oil sands in the belief this will be a long term feature of the refining mix in North America in the future. At least two proposals for new refineries and about a dozen expansions to process tar sands have been made in 2009 according to an article in the Financial Times. The article says many refinery expansions are already underway including those by BP, ConocoPhillips, Valero and Marathon. Analysts are quoted as estimating pipeline companies and refiners plans to invest more than USD 31bn by 2015 to export, process and distribute oil sands products creating a huge opportunity for stainless and steel suppliers to the industry. You can understand the refiners’ enthusiasm. The tar sands reserves are estimated at 175bn barrels of oil and they could see oil companies making plans to pour money into oil sands production as the oil price rose in 2007/8. But some of the steam has gone out of that market as environmental pressures have mounted. Shell is raising its tar sands production with the $14bn expansion of its 60% owned Athabasca Oil Sands Project to a capacity of 255,000 barrels a day due to be completed next year but have shelved earlier plans to raise production to 700,000 barrels a day. It’s not just the oil price either. Operators are reducing project cost estimates as post recession costs feed through and a switch to more conventional technologies is adopted. Husky Energy and BP have reduced their cost estimates at their Sunrise project to USD 2.5bn from an earlier USD 3.8bn. The scaling back of project plans has more to do with concerns over the medium to long term viability of tar sands extraction that emits high levels of green house gasses. In an increasingly carbon centric investment environment, oil companies worry that they should not over invest in a resource where producing a barrel of synthetic crude from oil sands results in greenhouse gas emissions three to five times greater than a barrel of conventional crude.

So although the Canadian tar sands are known to contain the second largest probable reserves after Saudi Arabia, unless a wholly new and much less polluting way of extracting them is developed they are likely to remain very much a marginal source for US oil supplies. The refining capacity may be in place and a new pipeline can move the raw material from source to market but if producers are not willing to pour the billions into developing the extraction facilities the Athabasca oil sands reserves will remain a sideshow.

–Stuart Burns

Comments (3)

  1. Jim Baird says:

    A new less polluting method of recovering oil sands does exist. The Nuclear Hydrocarbon Production Method uses the residual heat of spent nuclear fuel (SNF) to mobilize viscous bitumen and its ionizing radiation to fracture a portion of the long chain molecules in situ.

    Bitumen has unprecedented capacity to sequester radionuclides as was noted by a recent international study and the 80 percent of the oil sands that lays too deep to be mined is covered by a capping shale formation that would further aid in sequestering radionuclides.

    According to a 2000 U.S. Department of Energy report, Thermological Behavior at the Potential Yucca Mountain Waste Repository, the initial heat produced by U.S. nuclear waste will be on the order of 30 to 50 times the heat flux in the Geysers geothermal reservoir in California. According to The California Energy Commission, Geothermal Energy in California website, in 2007 California produced 13,000 gigawatt-hours of geothermal energy. Assuming the conservative estimate of 30 times this amount of heat flux for U.S. nuclear waste, 390,000 gigawatt-hours of energy is produced annually. This is close to half of the power output by America’s operational reactors (806.5 billion kilowatt-hours (bkWh in 2007) and the equivalent of 219,956,237.507 barrels of fuel oil (US). The energy return on investment for the SAGD is 5.2/1 therefore the heat flux of America’s nuclear waste alone has the potential to produce over a billion barrels of synthetic oil annually.

    The U.S. has approximately a quarter of the global inventory of spent nuclear fuel therefore the potential exists for the development of significantly more unconventional deposits with imported spent fuel.

    Utilizing SNF to produce the oil sands is technically indistinguishable from any other form of geothermal energy which derives its power from nuclear fission and is supported universally by environmentalists.

    Importing the global inventory of spent fuel to produce Alberta’s resource insures it can never be used for weapons purposes.

  2. Rod Clifton says:

    Wow…Nuclear waste to “fuel” the production of the oilsands. I can only imagine how that circle gets squared with the environmental lobby. I would bet the Canadian government would rather leave the oilsands alone than import spent nuclear waste. Doing so will most likely result in the reserves becoming more valuable over time.
    Interesting idea though.

  3. fran says:

    the oil sands may find rejection south of lat 49 north right up to the point of completion of the first pipeline to pacific ports and shipment to asia. you think earlier?

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