The Canadian Oil Sands: A backgrounder: Market Opportunities

by Bennett Jones LLP
Contact

The growth in extraction and production has been matched by significant investment opportunities in upgrading facilities and transportation infra-structure.

Transportation

Over 80 percent of bitumen produced in Canada is exported to the U.S. through existing pipelines. The bulk is delivered to upgraders in Petroleum Administration for Defense District (PADD) II (U.S. Midwest region), with the balance delivered to PADD III (Gulf Coast) and PADD IV (Rocky Mountain). The National Energy Board’s most recent oil sands report indicates that the industry should maximize its volumes in its traditional markets of PADD II, PADD IV and Washington State, with further market expansions and extensions later in the decade into California, PADD III and the Far East.

As demand for oil grows, markets with great potential for Canadian crude continue to emerge. California and the U.S. Gulf Coast both provide significant demand for medium and heavy crudes. Crude oil is currently shipped to California via pipeline and tanker. The U.S. Energy Information Administration predicts that a new or expanded pipeline to California will eventually be required to serve the growing demand of that market.

Proposed pipeline expansions to new and existing markets include proposals by corporations such as Enbridge Inc., Kinder Morgan and TransCanada Pipelines Limited to build and operate new pipelines and storage terminals.

Enbridge, for instance, has proposed the Northern Gateway Pipeline that would transport crude oil from Edmonton, Alberta, to a new marine terminal in Kitimat, British Columbia, whereby it would be shipped to China and other Asia-Pacific markets. The Northern Gateway Pipeline is currently seeking regulatory approval, and would represent a further expansion to Enbridge’s existing pipeline systems in Canada and the U.S. Enbridge’s Southern Lights diluent delivery system came into service July 2010 and carries product through 2,556 kilometres of pipeline originating near Chicago, Illinois, and terminating in Edmonton, Alberta. The Southern Lights project also includes the LSr Project, a 313-mile, 20-inch crude oil pipeline from Cromer, Manitoba, to Clearbrook, Minnesota. It added needed capacity for light/sour crude (thus the LSr name) between Cromer and Clearbrook. The LSr Pipeline was brought into operation in February 2009. Construction and line fill of Enbridge’s Alberta Clipper Pipeline from Hardisty, Alberta, to Superior, Wisconsin, was completed in October 2010. Current capacity of the Clipper is 450,000 bbl/d, with ultimate capacity of up to 800,000 bbl/d available.

In June 2010 TransCanada commenced commercial operation of the first phase of the Keystone Pipeline System. Keystone’s first phase was highlighted by the conversion of natural gas pipeline to crude oil pipeline and construction of an innovative bullet line that brings the crude oil non-stop from Canada to market hubs in the U.S. Midwest. An extension of the Keystone Pipeline from Steele City, Nebraska, to Cushing, Oklahoma, went into service in February 2011.The further proposed extension, the Keystone XL Pipeline, is currently on hold while the U.S. government conducts an additional environmental review, but TransCanada believes the pipeline will still be operational by 2013. The Keystone XL Pipeline is a 2,673-kilometre (1,661-mile), 36-inch crude oil pipeline that would begin at Hardisty, Alberta, and extend southeast through Saskatchewan, Montana, South Dakota and Nebraska. It would incorporate a portion of the Keystone Pipeline (Phase II) through Nebraska and Kansas to serve markets at Cushing, Oklahoma, before continuing through Oklahoma to a delivery point near existing terminals in Nederland, Texas, to serve the Port Arthur, Texas, marketplace. The Keystone XL Pipeline is cited as having an initial commercial capacity of 500,000 bbl/d and is estimated to cost approximately US$7 billion.

Kinder Morgan completed construction in late 2008 on the Anchor Loop project, its Transmountain Pipeline expansion, which runs across Jasper National Park and Mount Robson Provincial Park. The addition of the Anchor Loop increased the capacity of the Trans Mountain pipeline system from 260,000 bbl/d to 300,000 bbl/d, and helped to alleviate capacity constraints on Kinder Morgan’s existing system resulting from increased oil sands production.

Upgrading

Essentially all of the bitumen extracted from the oil sands must be upgraded; oil sands operators must therefore decide whether or not to do field upgrading. Upgrading transforms bitumen into synthetic crude oil, which commands a higher price when sold to refineries. Upgrading requires substantial capital and technological resources. The process enables producers to eliminate risks arising from the heavy oil/light oil price differential and further eliminates diluent cost risk and supply issues. Ultimately, the question for producers is whether the promise of higher, more stable netbacks (that generally result from an upgraded product) will offset the substantial capital costs.

The location of upgrader facilities has been influenced by economies of scale and cost factors such as shortages of skilled labour. Integrated oil sands operators have chosen to locate, expand existing and convert existing upgraders in the U.S. where larger facilities provide cost advantages over Canadian greenfield or expansion projects.

In October 2006, Encana and ConocoPhillips entered into a US$15-billion joint venture that includes Encana’s heavy oil projects in the North Athabasca region, along with ConocoPhillips refineries in the states of Illinois and Texas. The partnership plans to expand processing capacity at these facilities from approximately 60,000 bbl/d to 550,000 bbl/d by 2015.[1] Husky Energy and BP have entered into a similar arrangement in their Sunrise project, where Husky transferred 50 percent of its oil sands holdings for 50 percent of BP’s refinery near Toledo, Ohio. Husky acquired the Lima refinery in Ohio and plans to reconfigure and expand it to process heavy crude oil and bitumen.[2]

The possible regulatory and environmental impediments to the addition of oil sands upgrading/refining capacity in the U.S. have yet to be adequately assessed, but in Alberta they are better known and quantifiable. The issues companies confront in acquiring U.S. upgrading/refining capacity may ultimately prove more disruptive to project timelines than the constraints faced in Alberta projects. In addition, there is a significant governmental push to encourage producers to upgrade in Alberta. Currently, there are five upgraders in Alberta with a capacity of almost 900,000 bbl/d.

[1] “Encana, ConocoPhillips in $15B U.S. oilsands joint venture” (5 October 2006), online: CBC News http://www.cbc.ca/money/story/2006/10/05/encandaconocophillips.html

[2] “Husky Lima Refinery” (April 2009), online: Husky Energy
http://www.huskyenergy.com/downloads/abouthusky/publications/factsheets/FS_2009_Lima_Refinery.pdf

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bennett Jones LLP | Attorney Advertising

Written by:

Bennett Jones LLP
Contact
more
less

Bennett Jones LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.