Building a Refinery In Canada – Why Not?

We’re going to take a break from our regularly scheduled personal finance programming today to ask a question that would indirectly affect the PF situation of all Canadians.  With all the news about the Keystone XL and Northern Gateway pipelines over the last year or so, I have a serious question for anyone out there with the expertise to answer it: Why doesn’t Canada have its own refining capabilities?

I Didn’t Even Stay at a Holiday Inn Express Last Night…

Now I should admit right up front that I am no expert on this stuff.  I have an oddly high number of friends who are geologists though, and none of them could answer this question for me either.  Just form a basic logistics standpoint, shipping our raw bitumen and natural gas to China or the Gulf Coast makes little sense to me.  Again, no expert, but those are massive distances to cover considering there is nothing geographically special about New Orleans that allows ONLY that area to refine petroleum products to my knowledge.

Drill Baby Drill Is Fine and Good BUT…

keystone pipelineThere are a staggering number of benefits that Canada could reap from building its own refining capacity somewhere in the West.  I would think some area (after a couple millennia worth of environmental studies are done) in the Swift Current/Medicine Hat vicinity would make a lot of sense.  Those cities have some decent infrastructure available to build off of, and are along Canada’s main shipping route.  This would appear to be a central location between the Bakken formation, and the oil sands up north and would be fairly easily to build pipelines to.  We could stop fighting with Native bands and billionaire-funded American environmentalists, and benefit from all of the levels of production ourselves.  I believe that one of the main expenses where raw bitumen is considered is that pipelines have to be built much stronger than when the oil is refined due to the fact it is so much heavier.  Building a refinery in the proposed area would mean that transportation by truck, rail, or pipeline would be fairly straightforward (unless I’m missing something).  An immediate consideration would be could we actually get the USA part of the Bakken down in North Dakota and Montana to consider sending their raw petroleum up to us to refine?  Wouldn’t that be a huge coup for us?

Outsource-Proof

Perhaps the biggest benefit would be the massive long-term impact of jobs to the Canadian economy.  This would really be a “game changer” and would really “move the needle” (sorry, been watching too many political shows).  Think about how valuable thousands of jobs would be.  Many of the jobs would require post-secondary training, but many would be basic blue-collar labour jobs and would be able to soften the impact of deflating manufacturing and construction sectors all over our country.  Whether we want to admit it or not, outsourcing of production and good middle-class-supporting jobs is a major issue in our current economy (leading to the “donut economy” theory where our middle class is being hollowed out).  These jobs would be impossible to outsource due to their geographic dependence.  I can’t even imagine the corporate tax and personal income tax revenues that would be generated long term from this sort of project.

Cons and Costs

Now I’m not a total know-it-all here.  I realize that if this project had no drawbacks someone a lot smarter than me would have realized it and been profiting from it already.  So I’m asking if anyone knows what these drawbacks are?  If the issue is purely the massive amount of capital needed (in the hundreds of billions of dollars) wouldn’t this still be worth it?  There must be some sort of private-public partnership that could work in this regard.  I’m not much of a government-ownership type of guy, but wouldn’t this be something that governments at all levels could really sink their teeth into?  I know that Saskatchewan’s government has made a real commitment to the potash industry close to my area, and they are reaping the rewards big time right now.  Isn’t this just applying those concepts on a larger scale?  There must be a way we could sell specialized bonds, or appeal to Canadians to put the one-time costs on our collective line of credit (re: national debt) as long as we were able to prove the project would generate X revenue and fully pay for itself in X years right?

If it is an environmental issue then I’m really stumped.  Could we not build refineries just as good as China and New Orleans have?  I’m not much of an environmentalist, but I know that the area I propose to build a refinery on is one of the most geographically stable place on the planet.  These means very few earthquakes or hurricanes.  That has to count for something in this “once-in-hundred-years-storm-every-year” world right?  I often wonder if this is a case of Canada having laws that prevent a new refinery from being built because we want to be seen as environmentally friendly.  While I have no idea what the environmental impact would be (and I’m sure it wouldn’t be positive) I have to believe that it would be no worse than the impact our bitumen is making when it is refined elsewhere in the world.  If we’re sacrificing a ton of wealth in order to keep our hands clean (as opposed to actually making a difference in this environmental debate) isn’t that crazy?  Furthermore, I have to think eliminating thousands of kilometers of pipelines is pretty good for the environment right?

I Can’t Be the Only One Who Has Thought of This?

If we ever want to be more than hewers of water of timber don’t we have to look a little more long-term?  It looks like these petroleum resources are going to be around for a while, and I’m not saying we can’t continue to look into efficient renewable resources as well as looking into our petroleum refining capacity.  It just seems to me that paying other countries massive amounts of money to take our raw resources and then sell it back to us after we have essentially paid for their citizens to make a finished products seems a little insane.  This is especially true when you consider the labour market demographics right now and all of the manufacturing workers who are out of jobs or underemployed.

So if anyone can explain why shipping our raw resources thousands of kilometers makes any sense I’d honestly like to learn about it!

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12 Responses to Building a Refinery In Canada – Why Not?

  1. All interesting questions and sorry but I don’t have the answers. However, I do have another related question. The Keystone XL issue was being discussed on a CBC tv program the other evening and it was pointed out that here we are producing oil out in western Canada and trying to export it to the US and China while at the same time the provinces in the Eastern Canada are obliged to import foreign oil for their needs. Anyone see anything wrong with this picture? Wouldn’t it be nice if Canada could become fully energy self sufficient by sending the oil from west to east instead.

    • The thing is that Eastern Canada buys it from the nearest large refiner which happens to be the USA. I don’t mind selling our natural resources to the highest bidder (even Eastern Canada would win out in the long-term economic cycle), but lets get maximum value for them right?

  2. While I’m no fan of having anything like that in my own backyard (and anyone else’s for that matter….they’re probably the worse thing next to a nuke plant as a neighbour), you’d think that it’d be a no-brainer, especially in Alberta. Refine it ourselves, and sell the finished product to a immediate market of over 400 million. No pipelines, and less of a shipping issue then with thick molasses like crude I’d reckon. There’s only two reasons that I’m seeing why it’s not done.

    1) Where are all the oil companies based out of? And where’s the pineline going? Even if the companies are multinational, decisions are based in places like Texas, California, and Europe. The only thought of Canada in those decisions is how to get the base product to companies already running by said companies. And a nice slice of them are in places like Houston and Louisiana.

    2) Canada has had a lovely habit of selling ourselves for pennies on the dollar, having tons of resources but selling them to everyone else to be made into finished products that get a nice healthy markup. And governments have been a bit limp on supporting our industry segments, like say Diefenbaker with aerospace, or Mulroney with manafacturing. Could Harper be in that infamous list with “Energy” following his name? Turn the page.

    So ya in a world where we had business that looked out for the country they drawed resources from (or even better, had such companies based in said country), and didn’t have provinces that pissed themselves over inter-provincial rivalries almost consistently, we’d probably have such setups, either with existing refineries in Sarnia, Montreal, et al, or new ones near the fields, and have gas prices at the level they were before the Katrina farce. But that world doesn’t exist, and barring a radical reversal from multiple spots, wont’ anytime soon.

    • 1) Most of the oil companies in Alberta are headquartered in Alberta. The government has been pretty careful with who “owns” the oil sands. Maybe some of the the principal investors and/or board members could be slanting decisions though?

      2) We’ve long been hewers of wood no matter what party was in government right? Chretien’s policies on the oil sands were the same from what I can tell.

      I completely agree on the ridiculous provincial pissing contests that we get into. I often think that only in a country as abundant as Canada could we do so many things wrong and still live the life most of us get to lead.

  3. I work obliquely on oil and gas projects (downstream R&D) and most of us in the field agree that it should be a no-brainer for Canada to build more refining and upgrading capacity. Afterall it is the refined products that are worth the big bucks. Norway is a very good example of a country who are exploiting their oil/gas resources smartly as they required a lot of refining (and all of the R&D that goes with it) to be done in their country. Sadly, I think that things are going on behind the scenes to ensure that Canada doesn’t build proper refining capacity, but I don’t think we’ll ever know for sure.

    • Very interesting Patrick. Thanks for the comment, I appreciate an insider’s perspective. I’ve always thought Norway was doing some pretty cool things with their natural resources over there!

    • Yah I agree Patrick, Norway seems to be the logical comparison point and the place to look for answers. I didn’t even think about the R&D aspect, but you are completely right on that! I know that Canadian companies have been benefiting from the R&D done in the field of fracking and we hold much of the expertise in that area right now – I’m sure someone is making bucks off of that!

  4. I also work in the industry and disagree that more refining/upgrading capacity should be built in Alberta. I’m also not an expert, but know enough about the industry to share my opinion – hope you find this helpful.

    Most of the time, Western Canada has adequate refinery capacity to satisfy our consumption. Finished petroleum products typically have logistical issues such as transportation (it’s difficult to pipe finished products in lines that co-mingle with oil) & ‘cocktail’ gasoline specs that vary due to regional differences in legislation. Refiners with access to tidewater (i.e. Norway as well as the Gulf Coast) have access to markets transported by tanker that will take finished pet products which allow for more variable specs.

    Secondly, with respect to upgrading bitumen, the capital intensity required for a green field build is high. That’s why there are very few remaining upgrader projects still under consideration. Adding to this economic challenge is the increase in cheap, high quality tight oil production in the States (as well as some in Canada) that competes with our upgraded synthetic crude for refinery space. This explosion in oil production means that if we export our pet products, made with a higher op cost/barrel, will be competing with product made with cheaper crude. In fact, the eastern refiners a commenter mentions above are starting to switch to this cheap crude. Refiners are not ‘obliged’ to purchase offshore crude – market forces such as transportation costs & optimal crude grades that is refinery-specific determine what crude is purchased.

    The third point I would like to mention is that there is (more than) adequate refinery capacity in the US & Canada to satisfy consumption on a net basis. In fact, refineries in the Midwest & Gulf Coast have spent billions of dollars to retrofit for Canadian bitumen. As I mentioned above, new builds for refineries & upgraders are incredibly expensive, and considering adequate capacity already exists, there is little economic incentive to for green field projects.

    Lastly, I always wonder about the ‘jobs’ argument, particularly when you consider Alberta’s already strained labour market when it comes to construction labour. Is that really the labour market that is suffering from unemployment? This argument might make more sense in BC or even SK. Again, I’m not an expert, but thought I’d give my 2 cents.

    • Thanks TJ, very informative. Indeed, the point you raise about jobs is a good one. There is no real labour surplus in that part of the country, but to me it could be accompanied with some kind of program to encourage people from areas of high unemployment to move there and take the jobs. Maybe some sort of relocation incentive? It seems crazy to me how many immigrants Alberta is forced to bring in when our unemployment rate in certain parts of the country is still in double digits, and then we pay those people and give them incentives to stay exactly where they are. To me, one of the keys would be the type of jobs it would create. Those jobs could not be outsourced, and many of them wouldn’t be particularly specialized (although many more would be obviously).

      The competition with American crude makes a lot of sense. I guess maybe I’m underestimating the cost for bitumen pipelines and retrofitting of existing refinery capacity down south. Does anyone know of any existing infrastructure solutions Canada might already have? I’m aware of the reversing pipelines solution going on in Eastern Canada, does that hold a lot of promise?

  5. Refining typically occurs close to either: a) the final market for differentiated petroleum products or b) loading onto tanker for delivery of same to final market.

    Unfortunately, Alberta is some distance from both major consumption zones (east/west coasts) and major oceans (access to international markets). While it might make sense to build a refinery in coastal BC, chances are it makes much less sense to do so in central Canada (at least in terms of capacity beyond that required to serve the regional market, which won’t consume more than a small portion of regional production).

    Refineries are also amazingly capital intensive, and there is currently just no compelling business case to support their construction. In fact, there is a glut of continental refining capacity among major producers. There just isn’t a market incentive for the infrastructure to be built.

    • Note that this definitely does not preclude:

      1) More upgrading in Alberta (first stage bitumen refining)

      2) Using existing refining capacity in Eastern Canada (build/reverse dem pipelines!)

      3) New refineries where populations/markets warrant them perhaps (BC most likely)

    • Hmm… this makes a lot of sense Andrew. So, what you’re saying then is that refined petroleum isn’t often transported by pipelines anywhere? My rationale was that building a pipeline for refined petroleum to the finished market should be less labour- and materials-intensive than one to carry raw bitumen right? Could our rail lines somehow get in on this action in order to hall East-West, that infrastructure is already solid but obviously I don’t know about financially sound. I do know refineries are big time capital intensive, but like I said in the article, wouldn’t a private-public partnership make a lot of sense when you consider the spin off benefits?

      I’m pretty sure that at the mention of refining in coastal BC 3 environmentalists just spontaneously combusted!

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