Bust-town, Alta.

COMMENT: Are raw bitumen exports the Albertan equivalent of raw log exports from BC?

GORDON PITTS
Globe and Mail
February 20, 2009

FORT SASKATCHEWAN, ALTA. — In a snow-swept field northeast of Edmonton, a slender green smokestack rises like an impudent finger gesturing rudely at the economic carnage around it.

The stack is surrounded by industrial debris, including big tube-like steel vessels that cost more than $5-million apiece. The clutter suggests the scene at a messy apartment where the occupant got an unexpected phone call to vacate in a hurry.

This is the would-be home of a massive bitumen upgrading project, which, after a $530-million investment in land, equipment and technology, now lies abandoned by all but security guards. Its corporate owner, BA Energy, is in bankruptcy protection.

The site and the surrounding fields are where Upgrader Alley, a hotly anticipated $80-billion complex of oil sands processing and related industry, has hit its physical and symbolic dead end.

Columba Yeung has developed a technology that he touts as a more energy-efficient and productive way of turning bitumen into synthetic crude.

Of all the Alberta victims of the energy price implosion, the retreat from Upgrader Alley is the most crippling for the province and the country. Fort McMurray will continue to churn out raw bitumen from its mines and steam-fed underground wells, but the upgrader boom around Fort Saskatchewan, a half hour from Edmonton, cannot go ahead under the current economics.

It is a blow to countless dreams, not only in the 533-square-kilometre Fort Saskatchewan industrial complex but also the counties around it – an area that, even before the upgraders, had been branded Alberta's Industrial Heartland. It will be a crushing setback to Edmonton and its manufacturing complex of Nisku, south of the provincial capital, where a lot of the fabrication would have taken place.

Above all, it will dash Alberta's hopes of being not only the grubby mine site for oil sands extraction, but a value-added centre for upgrading raw bitumen into synthetic crude oil – and possibly a petrochemical cluster built around the byproducts of the process. The province's long-running pursuit of industrial diversification is once again on hold.

The hope was that the Heartland would upgrade two million barrels of bitumen a day. Now, there are fears that the action will shift south, as new and existing upgraders on the Gulf Coast or the U.S. Midwest suck away the lion's share of that new processing.

“That would be a horrible thing for the province,” says Debbie Hamilton, chief administrative officer for the town of Redwater, a village of 2,100 that has dreams of becoming a bedroom community for the upgraders. “It's like raping our natural resources.”

Upgrader Alley would have come with a huge environmental price. The Pembina Institute, an environmental research group, estimates that, with all plants operating under original projections, the upgraders would have generated as many greenhouse gas emissions as 10 million vehicles – and consume 10 times as much water as the City of Edmonton.

Those kinds of numbers will buttress the anti-oil-sands sentiment in the administration of U.S. President Barack Obama. But Alberta could also argue that if separate upgraders are now built in, say, Fort Saskatchewan, Omaha and Chicago, the total environmental footprint is much bigger because these are one-off investments. In Upgrader Alley, producers could cluster for efficiencies in areas like carbon capture and water use.

“I think that kind of logic would be something Canada and Alberta would want to discuss with the new U.S. administration,” says Joseph Doucet, a professor of energy policy at the University of Alberta.

Officially, there are still plans to build or expand eight upgraders in the region, which already boasts about 20 hydrocarbon processing plants and refineries.

But in reality, only one new project is a sure thing – a large expansion of Shell Canada Ltd.'s upgrader on its Scotford refinery site, where construction is now under way a little more than a kilometre away from BA Energy's abandoned operation.

All the others are under review or delayed, including the massive $10-billion project to be built by Petro-Canada and its partners; sites owned by foreign players Total SA (France) and StatoilHydro ASA (Norway); and independent “merchant” operations such as North West Upgrading Inc. and BA Energy itself.

The projects would have drawn an estimated 22,000 construction workers to the area by 2012, and as many as 12,000 permanent jobs. Now, when 4,000 workers wind up their building jobs at Scotford over the next two years, there is no assurance they will find a place to work locally. (Shell has 1,000 permanent workers on the site.) “A year ago, the big problem was, where will we find workers?” says Neil Shelly, executive director of the Alberta Industrial Heartland, a coalition of municipalities. “Today, we're switching to: How do you find work for these people?”

The shifting economics has choked off a local land boom, which Mr. Shelly calls “the Gold Rush of 2005 to 2007” – the period when, it seemed, every Fort McMurray operator was nailing down land positions here – even if they didn't have a project in mind. “It was like a tulip market back then,” he laughs.

The land grab fired entrepreneurial plans in housing, services and hospitality. But now the noon-hour crowds are dwindling even at the Atlantic Kitchen fish and chips restaurant a couple of blocks away from the constituency office of the local MLA, Premier Ed Stelmach.

“I'm a little bit worried now,” says Agnes Street, the restaurant's owner who relocated to Alberta from Newfoundland 13 years ago. The movement of her fellow Newfoundlanders is always a sure barometer of the state of Alberta's economy, and now, she says, the exodus is all back home.

Inside the halls of Alberta's legislature, there remains a keen optimism that the Heartland is not dead, but asleep.

“We hope soon to see a turnaround,” said Finance Minister Iris Evans. “We're optimistic that [shelved upgraders] will go ahead. The opportunity to develop our petrochemical and refining industries is part of a very great advantage of Alberta's future.” Upgrader Alley has been a victim of the oil price as it has tumbled from $147 (U.S.) a barrel to below $40 in less than eight months. But the writing was on the wall at least a year before the meltdown, as operators were scared off by soaring costs of construction and processing in Alberta. Upgrader Alley is as much a casualty of the Alberta boom as its subsequent bust.

The industry hates the term “tar sands,” but Mr. Shelly says it is entirely appropriate to describe bitumen from Fort McMurray – the stuff has the consistency of road tar on a hot summer day.

For it to be refinery-ready, it needs to be upgraded into synthetic crude, which means applying extreme pressure and heat to the gooey substance to separate coke, sulphur and other byproducts. At the moment, close to 70 per cent of the upgrading is done in Canada. Most of that work is done in Fort McMurray, but that area, with already massive mines and upgraders, faces huge cost and logistical challenges for future upgraders. So the idea was to dilute the bitumen and pipe it 400 kilometres to Fort Saskatchewan.

Fort Saskatchewan (pop. 17,000) is one of those places that garners dramatically different responses – a chemical engineer's dream, but an environmentalist's nightmare. Since the 1950s, energy processors have been drawn to this rolling farmland and bush along the North Saskatchewan River. It's near the hub of major pipelines; both major railways have lines running close to the site. While Fort Mac is isolated and hardscrabble, Fort Saskatchewan is almost a suburb of Edmonton with its amenities and urban lifestyle.

What's more, the area is blessed with huge salt caverns beneath the surface. When water is added and the salt solution flushed out, you have millions of cubic feet in storage capacity for natural gas and gas liquids. In addition, you have a ready supply of water from the North Saskatchewan.

The result is the largest hydrocarbon processing facility in Canada, home to operations of Dow Chemical, Sherritt International, Nova Chemicals and Agrium Inc., among others. The Industrial Heartland park boasts 3,500 direct jobs, but the number doubles in indirect employment.

According to Mr. Shelly, the potential to pipe in bitumen would have taken the Heartland to a new level of adding value. He paints a vision of using byproducts, such as petroleum coke, to fire up a chemical cluster patterned after industrial complexes in Europe, such as in Marl, Germany.

But in the crazy world of gyrating energy prices, the perverse economics of the oil sands took hold. First, there is the plunge in oil prices, which combined with the still lofty costs of labour and construction, put projects in peril.

But the killing blow was the arcane pricing of bitumen, which has raised doubts about the economics of upgrading the tarry oil in Canada. The idea behind Canadian upgraders was to capture the differential in price between raw bitumen and the more expensive synthetic crude that is produced through upgrading.

Under normal circumstances, that gap amounts to about 40 per cent of the price of West Texas intermediate crude, but in the past year it was narrowed to about 20 per cent.

The price of bitumen is set in the U.S. South and Midwest. In the past, upgraders in the region took a lot of their heavy oil from Venezuela and Mexico. But for reasons of politics and declining investment, those sources are in decline, and the U.S. players are looking north for supply. That demand is raising the price of raw Canadian bitumen and reducing the price differential sharply with upgraded crude.

As the gap narrows, it becomes more efficient to fill upgrading capacity in the U.S. – or to bolt an upgrader on to an existing refinery – instead of adding an expensive greenfield project in Fort Saskatchewan. The narrowing margins, combined with high construction costs, outweigh the expense of piping diluted bitumen from Fort McMurray to Galveston or Chicago.

Yet, amid the downturn, there is also a recognition that Upgrader Alley may not live up to its early billing.

“It was never clear that all of [the upgraders] were going to go ahead,” provincial energy spokesman Jason Chance said. “We're confident that many of those projects will come back. But there's a mistaken assumption that there are no benefits to the province if we sell our bitumen to other jurisdictions. What we know and believe is that the best value for Albertans comes in selling a whole range of products ... If it's all about one product, and an upgraded product, you're putting all of your eggs in one basket and we're not interested in seeing that happen.”

One great hope for the Heartland area is that the Alberta government uses more of its muscle to get upgrading done in Alberta. Particularly promising is a commitment to receive royalties from the oils sands in the form of actual bitumen – royalty-in-kind – instead of cash. Under this scenario, Alberta would use its bitumen supply to force-feed at least one new upgrader in the area. And if you build one, more will presumably follow.

“With bitumen in kind, you may have product for at least one large upgrader right there,” says Prof. Doucet, the University of Alberta energy specialist. Once that upgrader is a sure thing, the province could assemble infrastructure in Fort Saskatchewan to pool resources – water, steam, electricity, even space – among several plants. The economies of scale could be significant. “If you do it effectively, that should get you lower fixed costs per barrel,” he says.

The government repeated its commitment to a bitumen royalty in its oil sands development plan released last week and hopes to make a decision in “the next several weeks” on whether to begin soliciting companies for proposals, Mr. Chance said. That may be the best hope for BA Energy, which ran out of money last year, shut down its site and filed for bankruptcy protection. The story is poignant because BA is the brainchild of Columba Yeung, an entrepreneurial maverick in an otherwise Big Oil environment. Mr. Yeung was born in Hong Kong to a Catholic family – hence, the name Columba, an Irish saint. Trained in Canada as an engineer, he was once a key manager for Shell Canada, and was instrumental in designing the Scotford refinery.

Mr. Yeung, who controls BA's parent, Value Creation Inc., is an engineering genius who developed a unique technology that he touts as a more energy-efficient and productive way of turning bitumen into synthetic crude. But he ran into the global credit crunch, and, as an independent, lacks ready cash. He did not return a phone call for this article, but court documents have indicated BA is in talks with a large global company.

Whatever the outcome, it puts a serious crimp in his dreams of being a player in the Alberta oil patch. Still, he owns a big piece of real estate in the oil sands northwest of Fort McMurray. To succeed in the bitumen business, “you have to have a lot of dirt,” he said two years ago.

BA Energy has a lot of land and some of it may be bitumen-rich dirt. But what is missing now, as all the oil sands players have discovered, is capital and a profitable business model.

Albertans should have known that not everything on the drawing board would get done in Upgrader Alley. Now with just one project in the works, they are hoping something, anything, gets done.

With files from reporter Nathan VanderKlippe in Calgary