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US shale boom forces change in Canadian oil patch.

THE US shale oil shale oil

Synthetic crude oil that is extracted from oil shale by pyrolysis, or destructive distillation. The oil obtained from oil shale cannot be refined by the methods that have been developed for crude oil, however, because shale oil is low in hydrogen and contains large
 revolution is forcing Canada's oil sands industry to question whether there is a future in processing its crude into lighter oil, a tried-and-true way of wringing the most money out of a resource considered crucial to the country's prosperity.

Suncor Energy, which nearly 50 years ago pioneered the practice in Canada of mining and then upgrading the oil sands bitumen bitumen (bĭty`mən) a generic term referring to flammable, brown or black mixtures of tarlike hydrocarbons, derived naturally or by distillation from petroleum.  into refinery-ready light crude at the same site, served notice this month that the era of the integrated project may be ending.

It says it was reexamining a plan to build a multibillion-dollar upgrading plant in northern Alberta Norhern Alberta is a region located in the Canadian province of Alberta.

Its primary industry is oil and gas, with large heavy oil reserves being exploited at the Athabasca Oil Sands and Wabasca Area in the east of the region.
 and taking a C$1.5 billion ($1.5 billion) charge to account for lower projected cash flow. The reason: cheap oil from North Dakota North Dakota, state in the N central United States. It is bordered by Minnesota, across the Red River of the North (E), South Dakota (S), Montana (W), and the Canadian provinces of Saskatchewan and Manitoba (N).  and elsewhere is making it uneconomical over the long haul Long distance. Long haul implies traversing a state or a country. Contrast with short haul.  to build such complexes.

"Why would you spend billions of dollars to build an upgrader to create a product that is looking to be oversupplied in the markets you can access today?" says Jackie Forrest, director of global oil for consultancy IHS IHS

(I.H.S.) first three letters of Greek spelling of Jesus; also taken as acronym of Iesus Hominum Salvator ‘Jesus, Savior of Mankind.’ [Christian Symbolism: Brewer Dictionary, 480]

See : Christ



IHS
 CERA.

The Suncor move is more evidence of a shift from upgrading that is already well underway. Imperial Oil, for example, is building the C$12.9 billion Kearl development -- the next major oil sands project to come online -- without a processing plant.

Once considered a sure winner by most Canadians, the oil sands industry is now on the defensive on several fronts, struggling to prove it can deliver its raw materials to refiners at a competitive price and at an acceptable environmental cost.

The dilemma over upgrading points to more problems ahead as oil sands producers compete for capital against the developers of the cheaper, less damaging shale oil.

With less-processed heavy oil competing with the increased Bakken flows for pipeline space to US refineries, a glut in Western Canada
This article is about the region in Canada. For the school in Calgary, see Western Canada High School.


Western Canada, commonly referred to as the West
 has built up, generating a wide discount on Canadian crude against benchmark West Texas Intermediate. That has created an immediate problem, not the least for Alberta, the province at the center of Canada's oil industry.

Alberta Premier Alison Redford blames the so-called "bitumen bubble" for a forecast C$6 billion shortfall in revenues in the coming fiscal year. Deep budget cuts are in the offing coming; arriving in the foreseeable future.
visible but not nearby.

See also: Offing Offing
.

As a result, the province is pushing for ways to shore up its budget against the falling revenue stream, while unions are calling for more upgrading to create jobs.

PRICE DIFFERENTIAL The industry, however, seems to be moving in the opposite direction. The problem is, building a new upgrader - a tangle of pipes and vessels that transforms raw bitumen into an oil product easily used by standard refineries -- costs billions of dollars and may make little sense over the long term.

In the short term, on-site processing would allow producers to boost the price of their product by upgrading it, and the wide price spread between cheap heavy oil and more expensive light crude would mean hefty margins.

Indeed, the gap has recently ballooned to more than $40 a barrel under US benchmark West Texas Intermediate, compared with a historical differential of less than $20.

But it takes years to build upgrading plants. In the meantime Adv. 1. in the meantime - during the intervening time; "meanwhile I will not think about the problem"; "meantime he was attentive to his other interests"; "in the meantime the police were notified"
meantime, meanwhile
, new pipelines to export markets are expected to be built over the next decade -- whether they are big ones such as TransCanada Corp's Keystone XL pipeline or incremental expansions.

If that happens the discount on heavy oil should shrink. That would leave the multibillion-dollar upgrading plants less able to compete with shale oil.

IN THE PIPELINE To be sure, the Keystone XL project -- connecting the oil sands with the US Gulf Coast -- is facing a full-scale push back from US environmental groups, and final approval from Washington is not guaranteed.

If the pipeline gets built, it would move 830,000 barrels a day of Alberta crude to Texas refineries, many of which are configured to process the heavier grades that are now imported from Venezuela, Mexico and elsewhere.

On today's pipeline network, it costs about $8.50 a barrel to ship crude to the US Gulf region from Alberta, traders say. When new pipelines are built, the light-heavy oil price spread is expected to come close to the shipping cost.

"You expect those bottlenecks will be gone, and once we get global pricing, we've actually seen fairly narrow differences between light and heavy crude," says IHS's Forrest.

SUNCOR DECISION Against that backdrop, Suncor says it hasn't made a final decision on the proposed Voyageur voy·a·geur  
n. pl. voy·a·geurs
A woodsman, boatman, or guide employed by a fur company to transport goods and supplies between remote stations in Canada or the U.S. Northwest.
 upgrader, the centerpiece of its expansion strategy.

"We're looking at all options," chief executive Steve Williams says this month. "At one extreme you could go ahead with the project as it is. At the other extreme you could cancel the whole project and go ahead with nothing."

Williams fingered the US shale boom as the main reason for the indecision, as oil coaxed to the surface using hydraulic fracturing Hydraulic fracturing is a method used to create fractures that extend from a borehole into rock formations, which are typically maintained by a proppant. The method is informally called fracing.  does not need expensive upgrading to be run in standard refineries.

Suncor ... holding up expansion

Oil production in North Dakota has jumped to 730,000 bpd today from just over 100,000 bpd in 2006, making it the No. 2 oil-producing state after Texas. Large volumes of that crude is transported on the same pipelines as the Alberta oil, contributing to the disappearing spare capacity.

In the past year, both Bakken oil and upgraded light synthetic crude, which have similar specs, have climbed in tandem Adv. 1. in tandem - one behind the other; "ride tandem on a bicycle built for two"; "riding horses down the path in tandem"
tandem
 to around par with WTI WTI West Texas Intermediate
WTI Western Transportation Institute (Montana State University)
WTI World Tribunal on Iraq
WTI With The Idea (used in chess to point to the idea behind a specific move) 
, from around $13 a barrel below.

A recent PriceWaterhouseCoopers study says shale oil is likely to make the largest single contribution to total US oil output growth by 2020, and that increased global shale output could lead to lower crude prices than are currently projected.

Those barrels have begun to replace some heavy crude in the US market, squeezing the economics on upgrading plants that would pump out products to compete, says Reynold Tatzlaff, PwC's Canadian energy leader.

NOT DEAD That's not to say upgrading is dead. Existing plants pump out more than 1 million barrels of light synthetic crude a day. Privately held North West Upgrading and Canadian Natural Resources are proceeding with a C$5.7 billion stand-alone upgrader and refinery near Edmonton.

But the North West plant will get help from a steady supply of bitumen from the Alberta government as part of an initiative to generate more valued-added dollars. Expansions, such as one that Canadian Natural is planning at its Horizon oil sands project, come cheaper than starting from scratch, though it is not rushing to start the project.

Mike Deising, a spokesman for Alberta Energy Minister Ken Hughes, says he could not comment on various companies eschewing upgraders, saying they all employ different forecasts.

In another trend working against upgrading, oil sands mining is giving way to less-centralized steam-driven production methods, which are less costly to expand and which can ship diluted bitumen directly into the market. Several US refineries have been retooled to run more of the heavy crude.

Meanwhile, notorious construction cost overruns and a string of outages at existing upgraders have raised questions about reliability of returns and operations.

For more than a decade, most tar sands projects in Alberta blew well through their budgets as the rush to develop the resources stretched Alberta's skilled labor pool thin. Companies sought to bolster manpower by importing workers from around the world, and the rush to develop drove up the costs of steel, other materials and equipment.

Several plants proposed before the 2008-2009 financial crisis were canceled, as credit dried up.

"It's been the perception that any and nearly all upgraders have been plagued with fires, maintenance issues, cold weather issues. They're expensive to run, and even more so, they're expensive to build," says Wood Mackenzie analyst Mark Oberstoetter.

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Publication:Oil & Gas News
Geographic Code:1CALB
Date:Mar 11, 2013
Words:1309
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