Analysts say the economics aren’t there.
August 27, 2012
by CANADIAN PRESS
VANCOUVER — Whether they’re crossing the border into the US or heading west to the BC coast, the controversial pipelines linked to the Alberta oil sands have one purpose: to get the thick, heavy bitumen out of the country.
But Enbridge’s Northern Gateway and TransCanada’s Keystone XL pipelines, which have been fighting for the approval of governments, regulatory agencies and the public, have renewed a debate over whether Canada should be refining the raw bitumen at home instead of exporting it to be refined farther afield.
The federal NDP think we should, arguing new refineries would be a boost to the economy and create much-needed jobs.
So does BC newspaper mogul David Black, who raised eyebrows – and rolled some eyes – earlier in August when he proposed a $13-billion refinery at the end of the Northern Gateway pipeline on BC’s coast.
However, there hasn’t been a new refinery in Canada since 1984, and many observers say that’s unlikely to change any time soon, whether in BC or elsewhere.
Oil refining is a volatile, low-margin business, they say, and it’s far cheaper and much simpler to export crude to countries that already have refineries ready and willing to process it, particularly the US and China.
“It gets a lot of points to say, ‘We’ve got to do things at home, we’ve got to be independent, we ought to not depend on somebody who could change their mind,’ but as an economic matter, it doesn’t really make sense, or we would have been doing it,” says Michal Moore, a professor at the University of Calgary’s public policy school.
“My guess is that under current circumstances … that ship probably has sailed.”
Canada is a net exporter of oil, and the increasing production from the oil sands combined with the closure of Canadian refineries mean the amount of raw crude leaving this country to be refined elsewhere will only increase.
Production in the oil sands is projected to double by 2035. At the same time, the number of refineries in Canada has been steadily decreasing, from more than 40 in the 1970s to fewer than 20 today. Several of the refineries that still exist are at risk of closing or are already scheduled to shut down.
Building a new refinery would be a long and expensive proposition. Such a facility would cost billions of dollars and likely take a decade to obtain the necessary government approvals and build, says Moore.
Compare that to the alternative: exporting crude to the US, where refineries are far below capacity and eager for Canadian crude, or to Asian countries such as China, which is constructing massive refineries to meet that country’s rapidly growing demand.
“If you think of the cost of capital, it’s much easier to just go offshore and move product by ship or rail to existing distribution points,” says Moore.
“Our comparative advantage lies in being able to get our products upgraded to a point where they’re competitive, but just at that point, and then shipping them to areas that have got sufficient refining capacity to deal with them.”
A report last year from the Conference Board of Canada noted the current roster of refineries still operating in Canada is more than enough to meet domestic demand. While the number of refineries has been cut in half, upgrades and expansions over the years have kept the refining capacity at the same level and Canada continues to refine more fuel than it needs.
That means any additional oil production – whether in the form of crude or refined fuel – would be destined for export.
It’s more complicated to export refined products, rather than simply exporting raw crude, because every jurisdiction has different standards for fuels to meet, says Greg Stringham of the Canadian Association of Petroleum Producers.
“Most refineries usually refine close to their market because of the gasoline and fuel specifications in each of those areas,” says Stringham. “So that’s why it leans to, let’s move the crude around.”
The federal New Democrats have suggested Canada needs more refineries, arguing such facilities would create jobs and bring in tax revenues, though the Opposition party hasn’t said how it would overcome the economic challenges that have until now prevented that from happening.
The party’s energy critic, Peter Julian, says the New Democrats want to spur a “national discussion” on how to develop such infrastructure. “What we really need are more value-added jobs in Canada, and that something that is going to be part of the debate,” says Julian.
“We’re not laying out a full blueprint because we haven’t had this kind of discussion in Canada. It’s been very ad hoc, and the Harper government has simply approved whatever the oil and gas industry has proposed. What we need is a more thoughtful approach.”
The federal Conservative government, a strong proponent of pipelines such as the Northern Gateway project and the Keystone XL line into the US, appears content to let the market decide whether it’s a good idea to build new refineries.
Natural Resources Minister Joe Oliver says the only alternative would be to build refineries with government money.
“The economics have to be there to do it, and the fact that there hasn’t been a refinery built since the early ’80s indicates that the economics weren’t there,” Oliver said. “That’s a pre-condition, unless of course the government is willing to subsidize the industry to the tune of many billions of dollars, and that’s certainly not our approach.”
Oliver said even if Canada exports a significant amount of raw crude, the industry still keeps hundreds of thousands of people employed and pays billions of dollars in taxes and royalties.
“You’re not going to not export wheat because there’s some employment in baking bread.”
© 2012 The Canadian Press