“Let’s go to the PUB!” – Canada looks to solve takeaway problems with new strategies

By Dan Cronin and John Auers

The song, “Let’s go to the Pub” by Bowling for Soup, addresses everyday problems in the world that can be solved by – you guessed it, going to the pub!   Perhaps you missed an anniversary/birthday or perhaps your boss is giving you trouble at work, then going to the pub is obviously the answer!  While I am sure the pub has been the temporary solution for many veterans of the oil patch here in Western Canada (I know it has been for me) – PUB or Partially Upgraded Bitumen might actually be a permanent solution to some of the key issues that producers are currently facing.  The Government of Alberta certainly sees the potential in PUB and is providing $C1 billion in support for developers of various different types of PUB through loan guarantees and grants.  Value Creation Inc. became the first recipient of these government incentives when it was awarded $C 440 million in loan guarantees on January 23 and more contracts are expected soon.  In this first in a series of upcoming blogs focused on PUB issues, we provide an introduction to the subject, describing what PUB is, why it is being developed and present some of the questions which need to be addressed by all segments of the supply chain in order to make it successful.

Partially Upgraded Bitumen: What is it and Why Now?

PUB is relatively new to the Canadian oil industry and as the name suggests, PUB is bitumen that is wrung out of the oil sands and is partially upgraded.  PUB is the latest push forward by producers and the Province of Alberta to not only move more bitumen to market but to also secure higher pricing in the process.  PUB may be the next step in a long line of innovations that have come out of the Canadian oil sands.  This blog is the first installment in a series of blogs that will discuss PUB.  As you will soon learn, the case for PUB is compelling; however, numerous questions remain at the producer, midstream, and refinery segments of the industry.

Producer

  • How far along the upgrading spectrum should I process the bitumen?
  • Will I obtain the necessary premium in the marketplace to justify the capital expenditure to produce PUB?
  • What is my PUB worth and where is the highest netback market?

Midstream

  • Will pipelines accept and be willing to move PUB?
  • Will merchant storage facilities (e.g. Cushing, OK) accept PUB?

Refinery

  • Is all PUB the same?
  • When can I expect to see PUB in the market in a significant volume?
  • How much will a PUB barrel cost?
  • Can my refinery run PUB?
    • If “yes” – how much can I run?
    • If “no” – what would be the incremental capital investment to run PUB?

Before we discuss PUB and the rationale behind this path forward by industry, we must first discuss a brief history of the oil sands and how the associated bitumen is moved to the end market today.  Bitumen, in its natural state, has a density of ~8° API which is too viscous to be transported through a pipeline and as a result, the bitumen must either be blended with a material of lower viscosity or be processed in order to meet pipeline specifications of ~20° API.

To meet pipeline specifications via blending, bitumen is usually combined with either condensate to create a DilBit (the blend choice of producers today) or with sweet synthetic crude oil to create a SynBit.  In addition to blending, bitumen can also be processed/upgraded in order to meet pipeline specifications.  The primary benefit associated with full upgrading is the premium that light sweet crude garners in the market over heavy crude oil and that the fully upgraded crude does not require blending to meet pipeline specifications.

With two proven methodologies already in place (blending or full upgrading), why is there a drive by both the producer and the Alberta Government for PUB?  The answer to this question lies in some of the disadvantages associated with each methodology.

The disadvantage of DilBit is that Alberta is condensate short and as a result, condensate must be imported into the Province by rail and most notably by pipeline.  In fact, in order to accommodate the necessary condensate demand, Enbridge reversed Line 13 (Edmonton, AB, to Manhattan, IL) in 2010 and instead of exporting crude out of Alberta the pipeline (“Southern Lights”) is now configured to transport condensate into the Province (Enbridge now has a plan to re-reverse this pipeline in ~2023 and place it into light crude oil service with a capacity of ~150 KBPD).  As bitumen production continued to grow, the demand for condensate also grew and so the Kinder Morgan Cochin pipeline system (capacity ~95 KBPD) was also reversed in 2014 to transport condensate from Kankakee, IL, into Fort Saskatchewan, AB.  The use of condensate as a diluent hurts export capacity in two ways.  First, a potential export pipeline is being utilized to import condensate.  Second, the imported condensate is occupying  ~30% of the volumetric space on any DilBit barrel exported out of the Province – space that would be better utilized for actual Western Canadian production and not imported condensate.

The primary disadvantage associated with full upgrading is capital cost overruns – a notorious challenge that has plagued the Alberta industry for years.  The most recent upgrader scheduled to be built (Suncor Voyageur) was canceled in 2013 predominately due to capital costs.  More recently, the North West Redwater Sturgeon Refinery (NWRSR) has experienced significant capital cost overruns, and the project has more than doubled from the original estimate of $C4 billion in 2008 to the latest estimate of just under $C10 billion.  Producers have been, and will continue to be, weary of full upgrading projects.

The existing environment of limited pipeline capacity, volatile netbacks (a function of limited pipeline capacity), and a history of extremely large capital cost overruns on full upgrading projects has forced producers to turn their attention to partial upgrading.  PUB is expected to possess the following benefits:

  1. Lower transportation costs vs. DilBit;
    1. Diluent reduction or avoidance;
    2. Less overall volume to market;
  2. More effective use of pipeline space;
  3. Increased market potential vs. DilBit; and
  4. Lower capital costs vs. full upgrading.

There are many producers who have invested in PUB.  Each producer has their chosen technology and associated capital costs for their partial upgrader.  The challenge for the producer is to determine the sweet spot between capital outlay and the relative price received in the market (i.e., will the premium and diluent cost savings obtained justify the capital expenditure of a partial upgrader?).

As producers continue to investigate PUB, the existing Alberta Government is also incentivising the industry to pursue the idea of PUB through the “Partial Upgrading Program.”  The Alberta Government has provided $C1 billion in financial incentives ($C200 million in grants and $C800 million in loan guarantees) to encourage 2-5 PUB facilities to be constructed.  Calls for applications closed on September 4, 2018, and there were six proposals submitted that collectively totaled ~$C5 Billion in investments.  The first successful applicate of the Program was Value Creation Inc. (VCI).  On January 22, 2019, VCI was able to secure $C440 million in loan guarantees for their partial upgrader from the Alberta Government.  VCI expects the partial upgrader to be operational in 2022.  The facility is expected to cost ~$C2 billion and would process 77.5 KBPD of DilBit and produce a medium sour synthetic crude along with Ultra Low Sulfur Diesel (ULSD).

In the next installment of the PUB blog series, we will continue with our focus on the producers.   We will identify some of the key players and timelines, discuss the potential uplift associated with PUB, and identify potential challenges that producers may face in the marketplace.

Due to the time and space limitations of a weekly blog, we have included only a high-level discussion of PUB here.  If you are interested in more information about PUB and how it could/will specifically impact your company’s future plans or strategies, please call or email us  at 214-754-0898 or jauers@turnermason.com  and dcronin@turnermason.com.    .