Alberta moves to boost upgrader capacity

July 23, 2009 | By Nathan Vanderklippe, Globe and Mail | read source

Province begins process that, by 2012, would see it sell up to 75,000 barrels a day of the thick substance to a firm in Alberta

Alberta's government plans to deliver a bitumen-filled shot in the arm to companies working to build new domestic oil-sands-processing capacity.

In January, Alberta began accepting royalty payments in the form of bitumen - at least on paper - the thick substance that energy companies pry from the oil sands.

Yesterday, it began a process that, by 2012, will see it sell up to 75,000 barrels a day of that bitumen to a provincial firm for upgrading.

It's a move that could lay the foundation for a new bitumen-processing upgrader in the province, say the respective leaders of North West Upgrading and Value Creation Inc., companies already working hard on the proposal.

Upgraders are massive, energy-intensive plants that work like prerefineries, taking the thick, heavy oil sands bitumen and transforming it into a light crude that can then be refined into products such as gasoline and jet fuel.

It is a form of value-added work, and 60 per cent of current oil sands production is upgraded in Alberta.

The once-promising prospect of a half-dozen major facilities had stirred visions of an Alberta industrial heartland. But critics have since lamented the apparent demise of local upgrading after high-profile projects like Imperial Oil's Kearl mine, and the proposed Petro-Canada Fort Hills mine, announced plans to ship their bitumen to the United States.

A provincial move to guarantee royalty-collected bitumen to a local upgrader could, however, reverse that trend and create an environment for a new upgrader not attached to a specific oil sands product. So far the province has issued a draft request for proposals, but it intends to solicit bids by the end of the summer, and select a winner by year-end.

It wants the upgrader running by 2012.

"This is really great. It makes me proud to be Albertan," said North West chairman Ian MacGregor.

"To finance something as a small guy, you want to make sure you've got security of supply [which a contract with the province would provide]. So this moves the needle a lot."

Columba Yeung, founder and chairman of Value Creation, called the government bitumen supply "a very key factor" in determining "when we are going to restart the project." Value Creation had already laid much of the physical foundation for its upgrader near Fort Saskatchewan, which it hopes will eventually process 260,000 barrels a day, before financing issues caused it to halt construction last year.

Currently, the only upgraders in Alberta are run by companies with huge oil sands capacity, including Suncor Energy Inc., Royal Dutch Shell PLC and the energy-consortium-owned Syncrude mine. The government will collect bitumen royalties from these companies in the usual way, with no plans to take physical product from them.

Instead, the 75,000 barrels a day will come from companies which, like EnCana Corp., ConocoPhillips and Total SA, use high-pressure steam to coax the bitumen out of the ground.

Companies with existing upgraders had warned that physically taking their bitumen would be difficult and costly.