Underutilized U.S. Refining Capacity and Transportation

Figures released by the United States Energy Information Administration (EIA) indicate that utilization rates at major U.S. crude processing plants are low – the percent utilization of refinery operable capacity was around 80 to 85 percent for a majority of 2011 and has remained the same thus far in 2012, whereas pre-recession levels frequently reached 95 percent or higher. Such low utilization rates have been attributed to factors such as increased competition from “super-refineries” and developing markets, lower profit margins in the refining sector, and fluctuating consumer demand due to high gasoline prices. The success of the Canadian oil sands is seen as a development that could have a rebound effect on the U.S. refining industry. Higher volumes of heavy crudes from Canada offer potential to improve operating margins for U.S. refiners, many of whom long ago made expensive upgrades in complex facilities that favor heavy oil, which was historically imported from Mexico and Venezuela but is now in decline. As oil sands recovery techniques continue to become more efficient and overall oil sands production output continues to increase, the oil sands will have a proximate advantage relative to foreign rivals. Such advantage is predicated on the necessary pipelines and transportation infrastructure such as the Keystone XL pipeline expansion being completed, such that Canadian oil sands production can access the underutilized U.S. Gulf Coast refineries.

Keystone XL Pipeline and Canada-U.S. Energy Policy

TransCanada Corp.’s Keystone XL pipeline is a proposed expansion of the existing Keystone Pipeline System, which is currently used to transport crude oil from Alberta’s Athabasca oil sands region to refineries in Illinois and Oklahoma. The project, which would expand capacity by 500,000 barrels a day and extend the line to refineries along the U.S. Gulf Coast, is currently one of the most contentious and controversial topics in Canada-U.S. relations and the North American energy industry. On January 19, 2012, the pipeline approval was delayed when President Obama rejected the construction of the project, stating that a congressionally imposed deadline did not provide enough time to review all of the potential environmental impacts. President Obama made it clear that he was not denying the pipeline on its merits and encouraged TransCanada to reapply, knowing that there would not be a decision made until after the U.S. presidential election in November 2012.[1]

Proponents of the Keystone XL pipeline say it is a win-win for the U.S. and Canada, as Canada will gain a stable market with steady demand and the U.S. will improve its energy supply and economic security. Alberta-based industry has indicated that the rejection of the Keystone XL pipeline would strengthen the push for export routes to Canada’s West Coast to access Asian markets in lieu of American markets. Opponents to the expansion cite environmental concerns, such as the potential consequences of a leak or spill along the route, and question the need to expand existing pipeline capacity between Canada and the U.S. While Canadian approvals for the project are already in place, TransCanada plans to refile its application in the summer of 2012, which will address many of the environmental concerns. TransCanada has also stated that it will move forward with the southern portion of the pipeline, which runs from Oklahoma to the Gulf of Mexico, as this southern leg does not require U.S. State Department approval. Pending approval of the northern leg of the pipeline, the entire project is now expected to be operational by 2015.[2]

Carbon Policies in Consumer Markets

A recent political hurdle that has emerged for Alberta’s oil sands production is the introduction of new policies in consumer markets that require oil suppliers to reduce the carbon footprint of their motor fuels. Production in the oil sands is shifting away from traditional mining and towards steam injection, which results in higher emissions due mainly to increased natural gas consumption. A prime example of these new policies is in the state of California, which is the largest gasoline consumer in the United States and which has adopted a low-carbon fuel standard. This standard measures the carbon footprint not just by its emissions, but instead across the full product life cycle, which could potentially force change in the production technologies of the oil sands producers. The evolution of California’s low-carbon fuel standard is being closely watched, as eleven further states and even the European Union, are seeking to adopt a similar standard.

Across the Pacific, China’s government has introduced a plan to cut carbon dioxide emission per unit of gross domestic product by approximately 45 percent by 2020 and to further reduce greenhouse gas emissions in specific cities. However, the long-term trajectory of China’s carbon plan remains unclear, as China’s energy demand growth is estimated to grow by 75 percent between 2008 and 2035, accounting for approximately 36 percent of all projected growth worldwide and therefore its emission policies will play an integral role in the future.[3]

Streamlining Regulatory Review Process – One Project, One Review

Under the Canadian constitution, provinces have ownership over the extraction and commercialization of natural resources, yet the federal government retains concurrent jurisdiction in some areas relating to natural resources such as competition/antitrust, environmental matters, offshore development, and pipelines which cross provincial borders. As a result, proposed natural resource projects in Canada have often required reviews and approvals from a myriad of provincial and federal agencies. In response to industry and stakeholder feedback, as part of the 2012 federal budget the government of Canada announced that it intends to implement a streamlined review process according the principle of “one project, one review”, which would be completed in a clearly defined time period. Early statements indicate that major project reviews will now recognize provincial processes as substitutes or equivalents to federal ones as long as they meet the requirements under the Canadian Environmental Assessment Act. The streamlined plan will see three federal agencies responsible for reviews — the Canadian Environmental Assessment Agency, the National Energy Board and the Canadian Nuclear Safety Commission — down from 40. This initiative could drastically reduce the review and approval times for major oil sands projects.

Natural Gas Pricing

With natural gas inventories in the United States at record levels and recent major discoveries in North America meeting market demand, gas prices are currently low and are projected to remain that way for the foreseeable future. These low prices have created favourable near-term conditions for thermal oil sands production, with natural gas being the largest input cost, employed both in the extraction and refinement of bitumen. Reduced natural gas prices help counter the effect of escalating operating costs such as labour, materials and equipment and lead to increased profitability from oil sands production.

Labour challenges

The Petroleum Human Resources Council of Canada forecasts that labour demands in Alberta’s oil sands operations will increase by 73 percent over the next decade with growing oil sands production as the key driver. In addition, the unemployment rate in Alberta is approximately five percent, which equates to near full employment, meaning that the industry is already stretched in certain areas, such as engineering and trade skills. Further, more than 30 percent of the industry’s core workforce is expected to retire within the decade, due to age-related attrition, as the first baby boomers turned 65 in 2011. This has lead to significant labour shortages and increased labour costs as the industry struggles to manage wages in an employee-driven labour market. The oil sands sector will have to give significant thought to effective and efficient strategies to work with the construction, maintenance and support services sectors, which are critical to the growth and sustainability of oil sands operations.[4]