Why Canada Would Rather Export Oil Than Refine It

Canada has always been known as a “hewer of wood and drawer of water” for its reliance on natural resources for economic growth, and nowhere is this more apparent than the way the country handles its extraction of oil.

None Oilprice
Jul 22, 2014 at 10:01AM
Energy, Materials, and Utilities

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Canada has always been known as a "hewer of wood and drawer of water" for its reliance on natural resources for economic growth, and nowhere is this more apparent than the way the country handles its extraction of oil.

Despite boasting one of the highest proven oil reserves in the world -- second only to Saudi Arabia at 175 billion barrels-- a high percentage of Canadian crude is shipped across the border for refining in the United States. This has led to charges that Canada is selling out its vast oil resources to the U.S. and failing to uphold the national interest in ensuring that refineries are built in Canada, with the benefits accruing to Canadians.

In recent years, these voices have been amplified by the Canadian government's strategy to build new pipelines and expand existing ones – namely the Keystone XL pipeline expansion that would ship more Alberta oil sands crude to U.S. Gulf Coast refineries, and Enbridge's Northern Gateway pipeline that would move Alberta oil to coastal B.C. for shipment to Asia.

The Communications, Energy and Paperworker's Union estimates that 18,000 Canadian jobs are lost for every 400,000 barrels of bitumen that are exported.

The Opposition New Democratic Party has called for a "national discussion" on how to develop new refining infrastructure they say would create jobs and bring in tax revenues, but has not said how they would overcome the economic challenges that have so far prevented new refineries from being built.

Those challenges, it turns out, are daunting.

The cost of a new refinery is pegged at $10 billion, and would take years to construct. A new one hasn't been built in Canada since 1984, or in the United States since 1976, although new refineries are in the works in Michigan and Illinois. A couple of years ago, British Columbia newspaper mogul David Black raised a few eyebrows when he proposed to build a $25-billion refining complex in Kitimat, using feedstock moved through a pipeline built with supportive native groups -- many of whom oppose the current Enbridge proposal.

Another major issue is excess refining capacity. While Canada only refines about a quarter of the oil it produces, it refines more oil than it consumes. That means any newly constructed refineries would be refining oil for export, not for internal consumption.

So much for refineries built by Canadians, for Canadians.

Looking at the North American market for refined products, it seems obvious that the majority of refining capacity would exist in the United States, considering the imbalance in population. The U.S. has 142 refineries. Canada has 19, with most clustered around Edmonton, Sarnia, Ontario, and Montreal. The number of refineries in both countries has declined over the years, due to stricter environmental standards, lower fuel demand, and the decreasing availability of sweet crude, which is cheaper to process than heavy oil, including crude from oil sands.

Michael Moore, a professor at the University of Calgary's Institute for Sustainable Energy, Environment and Economy, thinks Canada at one time may have been able to out-muscle the States in the downstream (refining) business, but has likely lost that opportunity for good.

"The time to make the decision [to build up Canada's refining industry] was probably 20 years ago, maybe a little before that," he told the Huffington Post. "When you didn't make that decision, you lost your ability to compete in that market. You couldn't catch up."

Moreover, said Moore, "Widespread higher quality refining capacity in Canada -- except in very specific instances -- is not likely to be very successful. We just don't have the distribution network to support it."

Viewing a map of that distribution network, it is instantly apparent that Canadian crude oil moves north-south, not west-east. Lines spinning out from the spider's web of production centered in northern Alberta, arc in a southeasterly direction toward the most highly concentrated population centers. Large swaths of central and northern Canada are without pipelines.

Because there are few pipelines running east-west, Canadian oil flows mostly south to the United States, where refineries with the capability of processing heavy oil (the kind Alberta oil sands produce) turn it into gasoline, jet fuel, and other refined products. Even if there were pipelines running from the Alberta oilfields to Eastern Canadian refineries, it is not at all certain the refineries could handle the feedstock.

That's because oil sands comes out of the ground as bitumen, which must be upgraded to lighter, synthetic crude to be able to flow in pipelines. There are no upgraders east of Alberta and only one refiner in Sarnia has a coker, leaving producers few choices but to flow the oil south. Refitting the refineries to receive oil sands crude is an expensive proposition that few refineries are willing to contemplate. These refineries are also competing against cheaper refining capacity in Asia, which would be only too happy to receive synthetic crude or raw bitumen from the oil sands.

When the crude flows south, Canadian producers receive a lower price for Western Canadian Select than the Brent crude oil that is imported by Eastern Canadian refineries. That difference in price costs the Canadian economy an estimated $19 billion a year, according to Bloomberg News, and is the primary reason that Canadian oil producers, along with the Canadian government, are pushing for more pipelines. The theory, and it makes good business sense, is that as pipelines free up more oil to move, the glut of oil in the Midwestern U.S., that is currently depressing the price of Western Canadian Select, will dissipate and prices will rise.

There is one way for more refineries to be built in Canada, and that is through government subsidies. The Alberta government recently struck a deal with North West Upgrading and Canadian Natural Resources to build a bitumen refinery north of Edmonton. Under the deal, North West Upgrading will receive a quarter of its bitumen from CNR, and the rest from the Alberta government. The province will also kick in 75 percent of the operating expenses, on top of a debt-financing arrangement where CNR and Alberta each loan the company $300 million.  

While some see project as evidence of private sector confidence in boosting Canadian refining capacity, others say it is proof that new refineries and upgraders are not viable without government largesse. The current Conservative government has clearly indicated its preference for pipelines over refineries and a reliance on the market when it comes to the economics behind any new refining capacity.

As Joe Oliver told Canadian Press when he was Natural Resources Minister in 2012: "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."

He added, "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."