Refining the process: Canada’s oil and the risk-averse nature of the oil industry

Under construction

Recent controversies surrounding the construction of inter-provincial and international pipelines to transport bitumen from the oil sands has raised questions about the reasons Canada does not develop an even more integrated value-added oil industry.  There is a call for keeping more employment in Canada and for expanded use of eastern oil refineries. Questions and concerns about the race to sell bitumen using today’s water-hungry and natural-gas hungry technologies, are being raised.  There is a call to slow down the process.

Canada is the only OECD nation that does not have a national energy plan which complicates the environmental and economic issues related to energy. Ever since Prime Minister Trudeau’s Energy Plan almost divided the country along the east-west axis, no Prime Minister has dared to touch the topic. In the Canadian system, provinces control energy while the federal government controls pipelines. Canadian cannot look to the risk-averse, profit-motivated oil industry to consider long-term resource development, investment of profits towards infrastructure beyond extraction, transportation and minor upgrading. It is only through federal-provincial and in some cases regional pressure that the oil industry could be pressured/encouraged to build oil refineries in Canada to develop an even more integrated oil industry. The federal government needs to take the lead.

Even though “we would get far more value for our resources if we were to ship refined product,” Canada only refines about 50% of oil and the rest goes to refineries in the United States. Increases in oil refinery facility size and improvements in efficiencies have offset much of the lost physical capacity of the industry.

While it is widely acknowledged that Canada needs to diversify and depend less on the United States as its major market, there are concerns about basing the Asian market on state-owned corporations. The Economist revealed some disturbing trends in this emerging form of capitalism: state capitalism.

Sixteen of the largest twenty global oil companies are state owned, and together control over 80 % of oil reserves. Their bottom line is profit and have no concern for Canada’s long-term economic health, employment, environmental impact, etc. We need a strong government position yet we do not have a cohesive energy strategy. The oil industry is a risk-averse industry and at this time there is an unwillingness to develop infrastructure beyond extraction and minimal upgrading. In the United States refineries are being closed. The proposed $6 billion Shell refinery was cancelled in 2009 because of  ”the current project execution environment, market conditions and the current inflationary pressures across the oil and gas industry.”

Although greener technologies are being developed, it is estimated that we will continue to be dependent on fossil fuels until c. 2040. Why not stretch out our use of these invaluable resources? There are opportunities for job creation through the development and implementation of  innovative marketable technologies that will make the extraction process more efficient, environmentally friendly and financially feasible? Federal funds have supported much research in the field that never sees the light of day because the oil industry, like the ocean liner, can’t adapt quickly to change.

Why does Canada not have more oil refineries?

Arguments for building more oil refineries:

• Increases in oil refinery facility size and improvements in efficiencies have offset much of the lost physical capacity of the industry.
• Recent controversies surrounding the construction of pipelines to transport bitumen from the oil sands has raised questions about the reasons Canada does not develop a more integrated value-added industry.  “We would get far more value for our resources if we were to ship refined product.”

Arguments against:

• “In 2009 through 2010, as revenue streams in the oil business dried up and profitability of oil refineries fell due to lower demand for product and high reserves of supply preceding the economic recession, oil companies began to close or sell refineries. Due to EPA regulations, the costs associated with closing a refinery are very high, meaning that many former refineries are re-purposed (Wayman E. Recession’s latest victim: oil refineries. Earth magazine. June 2010. Pgs 10-11).In 2009 Royal Dutch Shell Europe’s largest oil company closed oil refineries in the US and considered selling or closing its 130,000-barrel-per-day refinery in Montreal, which it has operated since 1933.
• Shortage of qualified labour
• risk-adverse industry
• oil industry is closing refineries not constructing new ones.
• multinational oil companies lack motivation to protect Canadian interests. 16 of the largest 20 global oil companies are state owned, and together control over 80 per cent of oil reserves. Canada had a state-owned oil company Petro Canada but it was acquired by Suncor.
• government needs to take leading role in motivating oil industry to build oil refineries in Canada to develop integrated oil industry
• high standards for environmental protection would be required in new constructions of oil refineries
• international companies like Imperial Oil look at profits for global company
• Does the world have lots of oil refineries?

• Kearn oil sands project: “The product will be transported to market through a pipeline system. Imperial and ExxonMobil own extensive refinery infrastructure in Canada and the U.S. that could receive bitumen or upgraded feedstock to make a variety of refined products. Production may also be sold to third parties. Any future upgrading capacity to support the Kearl project would be the subject of separate application.”

• Multinationals are not concerned about Canadian economy
• 1990s mergers created companies that have more market power
• loss of competition
• Athabaskan oil sands are extra heavy and high in sulphur involving most complex and expensive refining processes
• green movement has oil sands under microscope
• oil refineries are major polluters in themselves
• oil industry has market power so control of oil refinery production can affect gasoline prices etc
• weak anti-trust laws
• poor global economic conditions
• Albertan oil industry promises revenue and employment
• it is costly to build an economically oil refinery that passes environmental standards
• The biggest oil refinery Suncor in Edmonton, Alberta processes 135,000-barrel-per-day and runs entirely on oil sands-based feedstocks and produces a high yield of light oils.” Suncor be the fifth largest oil and gas company in North America with assets of $43 billion. When it acquired PetroCanada it became Canada’s largest upstream producer and second largest refiner of gasoline and oil products.

How much does it really cost to build a brand new and economically viable oil refinery?
The estimated cost of the Wallaceburg, Ontario oil refinery proposed by Shell Canada in 2007 was between $6 billion and $8 billion. The projections were for the employment of 700 people once operational and thousands of jobs during construction. The project was cancelled c. 2009 because of  ”the current project execution environment, market conditions and the current inflationary pressures across the oil and gas industry.”

Is there more of a financial benefit to Canada to see raw bitumen?

Cooper, Mark. 2003-10. “Spring Break in the US Oil Industry: Price Spike, Excess Profits and Excuses.”

Reductions in storage capacity and the number of gasoline stations of over ten percent have also taken place in just the past half-decade. These reductions in capacity have been driven in part by a merger wave that has resulted in a significant increase in the concentration of ownership of refinery capacity and gasoline outlets. Four-fifths of regional refinery markets have reached levels of concentration that trigger competitive concerns, even by the standards adopted by the antitrust division of the Reagan administration’s Department of Justice. In these markets, the largest four firms account for at least one-half and as much as three quarters of the refined product output. A similar trend has been in evidence at the level of gasoline stations.

“In 1990, 22 integrated companies covered an average of 28 states. In 1999, 17 companies covered an average of 26 states.”
(Gilbert and Hastings, p. 27; see also Hastings, Justine, “Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California,” Competition Policy Center, 2000.)
“The rule of thumb reflected in all iterations of the Merger Guidelines is that the more concentrated an industry, the more likely is oligopolistic behavior by that industry…. Still, the inference that higher concentration increases the risks of oligopolistic conduct seems well grounded. As the number of industry participants becomes smaller, the task of coordinating industry behavior becomes easier. For example, a ten-firm industry is more likely to require some sort of coordination to maintain prices at an oligopoly level, whereas the three-firm industry might more easily maintain prices through parallel behavior without express coordination (U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, 1997, at section 0.1.).”

How many oil refineries does Canada have in 2011?

“Canada is home to 18 refineries, 16 of which are operated by Canadian Petroleum Products Institute (CPPI) members and represent the majority of the country’s refining capacity. Canada is a net exporter, mainly to the United States, of refined petroleum products and crude oil.”

British Columbia

• Husky Energy Inc. Prince George Refinery, Prince George BC
• Chevron Canada Limited. Burnaby Refinery. Burnaby BC

Alberta

• Suncor Energy Products Partnership. Edmonton Refinery. Edmonton AB
• Shell Canada Products
  • Scotford Refinery Fort Saskatchewan AB
• Imperial Oil Limited Strathcona Refinery Edmonton AB

Saskatchewan

• Consumers’ Cooperative Refineries Limited Regina SK * Not a CPPI member
•  Husky Energy Inc. Lloydminster SK* Asphalt plant and CPPI member

Nova Scotia

• Imperial Oil Limited Dartmouth Refinery Dartmouth NS
• Newfoundland North Atlantic Refining Limited Come by Chance Refinery Come by Chance NF. North Atlantic Refining Limited is a downstream subsidiary of Harvest Operations Corporation which is a wholly-owned subsidiary of the Korean state-owned Korea National Oil Corporation (“KNOC”). The Korea National Oil Corporation, whose CEO is a KNOC executive who replaced is a “significant operator in Canada’s energy industry offering stakeholders exposure to an integrated structure with upstream (exploration, development and production of crude oil and natural gas) and downstream (refining and marketing of distillate, gasoline and fuel oil) segments. [] KNOC Upstream oil and gas production is weighted approximately 70% to crude oil and liquids and 30% to natural gas, and is complemented by their long-life refining and marketing business.” The replacement in 2012 of a Canadian CEO by a Korean CEO is considered to be a major paradigm shift in the Asian-Canadian oil investment partnerships.

Ontario

• Shell Canada Products a European Oil Major Sarnia Manufacturing Centre (Corunna refinery)  75,000 barrels of crude oil daily. Corunna ON Originally built in 1952 by Canadian Oil Companies Limited.
• Imperial Oil Limited Sarnia Refinery Sarnia ON
• NOVA Chemicals (Canada) Limited Sarnia ON “NOVA Chemicals’ Corunna site The Corunna facility started up in late 1977 and was purchased by NOVA Chemcals in 1988. It was the first fully integrated refinery and petrochemical complex in North America. It is a refinery and petrochemical complex that supplies between 30% and 40% of Canada’s total requirements for primary petrochemicals. The refinery is capable of producing in excess of 3.5 billion pounds (1.6 million tonnes) of basic petrochemicals and 3 billion pounds of refinery and energy products annually. The Corunna site processes crude oil, condensate and natural gas liquids (NGLs) that are delivered to the site by pipeline from western Canada. These products are the feedstocks used to manufacture ethylene, propylene, butadiene, iso-butylene, n-butylene, benzene, toluene and xylene. During petrochemical production, other co-products are also manufactured, including synthetic natural gas, liquefied petroleum gas, gasoline components, diesel fuel, home heating oil and heavy residual fuel oil. ” 500 employees work at the Corunna plant.
• Imperial Oil Limited Nanticoke Refinery Jarvis ON. Approximately 25 percent of petroleum products sold in Ontario originate from the Nanticoke refinery. Approximately 260 employees. Daily capacity: 112,000 barrels of crude oil.
• Suncor Energy Products Partnership Petro-Canada Lubricants Centre Mississauga, ON
• Suncor Energy Products Partnership Sarnia Refinery Sarnia ON

Quebec 

• Suncor Energy Products Partnership Montréal Refinery Montréal QC
• Ultramar Ltd. Jean-Gaulin Refinery Lévis QC
• New Brunswick Irving Oil Limited Saint John NB * Not a CPPI member

Ontario refineries had a capacity of 74,400 m3/day (468,700 b/d) in 2007. At that time these refineries included:

• Imperial Oil – Nanticoke, Ont. 112,100;
• Imperial Oil – Sarnia, Ont. 121,600;
• Shell Canada:
  • Montréal East Refinery 130,000 barrels of crude oil daily. Employees: 450 full-time.
  • Scotford Refinery 100,000 barrels of synthetic crude oil daily. Shell’s Scotford Refinery operational since 1984 is one of North America’s most efficient and modern refineries, and is the first to exclusively process synthetic crude from Alberta’s oil sands.
• Nova Chemicals – Sarnia 80,000; Corruna; Moore; St. Clair River;
• Petro Canada, Lubricant plant – Mississauga
• Suncor Energy Prod. Inc. – Sarnia 85,100

The following table is from Statistics Canada website.
Statistics on Canadian Petroleum products — Refined petroleum products, refinery production by type

Where are the existing oil refineries in Canada?

Centre for Energy: Canadian Oil Refineries Map

“One of the key barriers identified was the risk-averse nature of the industry. Unless industry is given a compelling reason to do so, such as fiscal or regulatory pressure from the government, companies are unlikely to invest in new refining capacity in the mature North American market. Rather, they will invest capital wherever in the world that returns are highest. According to industry, government will have to play an instrumental role if the vision is to be achieved (Laureshen, Clark and Du Plessis 2005:15).“

Context

Timeline of Selected Events in Integrated Oil Industry

2003 Between 2000-12 and 2003 there were four gasoline price spikes caused by domestic refining and marketing that resulted in an increase of over $30 billion in gasoline prices. (Cooper 2003).”

2003 Reductions in storage capacity and the number of gasoline stations of over ten percent have also taken place in just the past half-decade. These reductions in capacity have been driven in part by a merger wave that has resulted in a significant increase in the concentration of ownership of refinery capacity and gasoline outlets. Four-fifths of regional refinery markets have reached levels of concentration that trigger competitive concerns, even by the standards adopted by the antitrust division of the Reagan administration’s Department of Justice. In these markets, the largest four firms account for at least one-half and as much as three quarters of the refined product output. A similar trend has been in evidence at the level of gasoline stations (Cooper 2003).”

2003-03-11 “Consumer Groups Seek Energy Price Probe,” Energy Daily, March 11, 2003, p. 4.

2003 In the United States alone, 75 refineries were closed between 1988-2003 and no new refineries were constructed (
Cooper, Mark. 2003-10. “Spring Break in the US Oil Industry: Price Spike, Excess Profits and Excuses.” Consumer Federation of America.

2002 In 2002, 58 firms were engaged in refining in the United States, down from 189 firms in 1981 (source).

2001-05-21 Public Citizen, Record Oil Company Profits Underscore Market Consolidation, May 31, 2001; Fortune 500, July 18, 2001; Business Week First Quarter Results, May 21, 2001

2000 Between 1985 and 2000, average refinery utilization increased from 78 to over 92 percent (source).

1998 A wave of mergers, acquisitions, joint venture alliances, and selective divestitures started in 1998. The aim was cutting costs, gaining economies of scale, increasing returns on investment, and boosting profitability (source). Exxon and Mobil merged allowing both companies a larger share of the oil and gas market (horizontal merging).

1990s “The 1990s were widely viewed by the industry as a period of unprecedented economic volatility and hardship, characterized by poor profit margins as a result of substantial excess capacity, the increasing cost of compliance with environmental regulations, and unfavorable crude oil price trends. At the same time, the refining industry in the United States has been dramatically changed by corporate restructuring and consolidation (source).”

Webliography and Bibliography

There are major challenges in locating reliable sources of useful, comprehensible information on the oil industry. The following sources are not necessarily neutral. Wikipedia entries on concepts and organizations related to the oil industry constantly include warnings to readers that the entries may not be neutral and indeed reflect advertisement more than unbiased, information based on reliable sources. Citations often lack references.**

Statistics Canada. 2011. Petroleum products — Refined petroleum products, refinery production by type. Statistics Canada Energy Statistics Handbook.

Cooper, Mark. 2003-10. “Spring Break in the US Oil Industry: Price Spike, Excess Profits and Excuses.” Consumer Federation of America.

Peterson, D. J.; Mahnovski, Sergej. New forces at work in refining: industry views of critical business and operations trends, Issue 1707. National Energy Technology Laboratory United States Department of Energy. RAND: Science and Technology.

Canadian Centre for Energy. “About Energy: Oil & Natural Gas: Oil: What is crude oil?” **

Gary, James H.; Handwerk, Glenn E. 2001. Petroleum refining: technology and economics. Gary, James H.; Handwerk, Glenn E. 2001. Petroleum refining: technology and economics. Taylor & Francis. CRC Press. 2001 – Technology & Engineering New York:Marcel Dekker. 441 pages.

“Continuing the high standards set by earlier editions, Petroleum Refining, Fourth Edition summarizes recent developments in oil refining processes, addressing topics ranging from basic applications to the implementation of viable operations that meet environmental and economic requirements. The authors maintain the clear, systematic style that made previous editions so popular. This edition reviews petroleum-refining technology and refining processes, incorporates recent statistics on utility data, investment, and operating costs, and considers environmental factors, the place of reformulated fuels in product distribution, and uses for heavier crude oils and those with higher sulfur and metal (Review).”

Notes: Introduction: profitable products of refineries: transportation fuels gasoline, diesel, turbine (jet) fuels, light heating oils No 1. and No. 2
less profitable: lubricating oils, refrigeration and transformer oils, petrochemical feedstock; conversion of crude oil into transportation fuels economically practical represents only 5% of total crude charged to US refineries.

Laureshen, Catherine J. 2006. “From Oil Sands Bitumen to Petrochemical Feedstock.” Senior Research Manager, Alberta Energy Research Institute
Originally printed in: Oil & Gas Processing Review . 2006.

Laureshen, C. J.; Clark, P. D.; Du Plessis, M. P. 2005. “Adding Value to Alberta’s Oil Sands.” Alberta Energy Research Institute/Alberta Economic Development

Abstract:

“A rapidly expanding oil sands industry and a dwindling supply of feedstock for Alberta’s ethane-based petrochemical industry have stimulated interest in evaluating bitumen for producing a broad slate of refined products, including petrochemicals. Two industry/government studies evaluated different process schemes for integrating oil sands, refining, and petrochemical operations and convert heavy gas oils into both refined products and petrochemicals. Since market demand for fuels and refined products far exceeds that for petrochemicals, the performance characteristics of the heavy oil conversion processes are important to optimize the volume ratios of the products to meet market volume demands. The paper reviews different heavy oil processing technologies focusing on olefin to fuel product ratios and flexibility to change these ratios. The review includes conventional noncatalytic thermal (steam) cracking, as well as catalytic processes. These technologies are at different stages of commercial development for production of fuels and olefins, and must be evaluated and adapted to meet Alberta’s aromatic bitumen-derived heavy gas oils. Work is underway in an industry/government study towards developing an integrated process for the combined production of refined fuels and petrochemical feedstocks. In addition, two workshops were held in February 2005 to address the business and regulatory gaps that needed to be addressed before such a process can be commercialized; the results from the workshops will also be discussed in the paper (Laureshen, Clark and Du Plessis 2005:15).“

“Introduction: Alberta has an enviable position as a North American energy hub, providing oil and gas to United States markets through an extensive
pipeline network. In addition to conventional oil and gas, Alberta has large reserves of coal and coal bed methane, as well as the massive oil sands deposits that underlie 140,800 square kilometres of the province. The oil sands have outstripped conventional oil reservoirs as the primary source of oil in the province. According to the Alberta Department of Energy, production of bitumen and synthetic crude oil was close to 158,987.3 million m3/d (one million BPD) in 2003, as opposed to 100,162 m3/d (630,000 BPD) of conventional oil production. If all new projects, and expansions to existing projects currently planned, take place as scheduled, Alberta’s bitumen production is expected to triple by the year 2030. However, the continued expansion of Alberta’s oil sands faces significant challenges. Diluent availability is already a problem, water use is facing restrictions, and natural gas is becoming more costly and less available. A further problem is the ability of Canadian and U. . . . (Laureshen, Clark and Du Plessis 2005:15).“

Who’s Who?
“The Canadian Centre for Energy Information (Centre for Energy) is a non-profit organization created in 2002 to meet an urgent need for information on all aspects of the Canadian energy system from oil, natural gas, coal, thermal, and hydroelectric power through to nuclear, solar, wind, and other sources of energy. More recently, the Centre for Energy has taken steps to broaden its reach to encompass energy end use in Canada (“About: Centre for Energy’s web page)” Wikipedia editors cautioned that the Wikipedia article on the Centre “may be written like an advertisement with promotional content that was not written from a neutral point of view (October 2009). Wikipedia editors expressed concerns that citations provided no reliable references or sources (October 2009).**

Catherine J Laureshen “is a Senior Research Manager, responsible for the upgrading and university research programmes of the Alberta Energy Research Institute (AERI). Prior to joining AERI, she taught in the Department of Chemical and Petroleum Engineering at the University of Calgary, and was a member of the In Situ Combustion Research Group. Dr Laureshen is an active member of the Petroleum Society of the Canadian Institue of Mining, Metallurgy and Petroleum (CIM), sitting on the national board and chairing the publications board. She is the Technical Chair for the 2006 Canadian International Petroleum Conference and will be the Conference Chair in 2007. Dr Laureshen is also a member of the Canadian Heavy Oil Association (CHOA), the Society of Petroleum Engineers (SPE) and the Association of Professional Engineers, Geologists, and Geophysicists of Alberta (APEGGA). She has a PhD in mechanical engineering, with a specialisation in fluid dynamics.”

The Consumer Federation of America (CFA) is an association of non-profit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization’s Board of Directors (CFA about).

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