Gulf Coast refineries good place for Canadian crude, IHS analysts say

Environmentalists opposed to the Keystone XL pipeline say it would transport dirty Canadian crude through the heartland of America, only so it can be refined on the Gulf Coast.

But that’s not a bad thing, according to a new study from the energy analysts at IHS CERA.

In a report released late Wednesday, the analysts conclude that there’s a bigger economic boost from processing the raw bitumen harvested from Canada’s oil sands on the Gulf Coast, instead of first upgrading it into lighter synthetic crude oil locally.

Building brand new facilities in Canada to upgrade the tar-like bitumen harvested in Alberta is a costly investment that no longer pays off, especially since many refineries in Texas and Louisiana are already capable of processing the fossil fuel or can be more cheaply modified to do so.

“In many cases, new value-added upgrading and refining investments in Alberta have challenging economics,” said Jackie Forrest, IHS senior director. “Investors do not get a reasonable return on the billions they must commit for a bitumen processing facility.”

Read more: Market shifts for Canadian oil sands crude

As hard as a hockey puck at 50 degrees, bitumen is an extra-heavy crude oil that must be significantly processed before it can be transformed into diesel, gasoline and other valuable refined products. In the early years of Canadian oil sands development, producers almost always chose to locally upgrade the bitumen into a synthetic light crude oil before selling to refiners.

Now, most new oil sands projects are being developed without local facilities for processing the bitumen, amid increased interest in non-upgraded products that sell at a similar price. It’s hard to justify pouring money into new bitumen processing facilities when the upgraded light product only nets a slight price benefit in the market.

Instead, Canadian oil sands producers increasingly are blending the harvested bitumen with condensate, allowing it to flow through pipelines to refineries capable of converting it into lighter products themselves.

That change in practice means that instead of investing in new upgraders, companies can devote their capital to increasing oil sands production — leading to more permanent jobs in the region and better tax revenues for Canada, the IHS CERA report concluded:

“In a case where the region’s limited pool of construction workers is deployed on bitumen-producing projects instead of upgraders or refineries, this drives production higher, resulting in more jobs and economic benefits to Alberta and Canada,” the report said.

Energy companies are already using rail to transport Canadian oil sands crude to the Gulf Coast, but TransCanada Corp.’s proposed Keystone XL pipeline would allow more of the product to make it to refineries in east Texas.

Shown are oil sands - a mixture of clay, sand and bitumen -- removed from a Suncor mine in Alberta, Canada. Bitumen is a highly viscous, super-sticky, thick product that is generally the consistency of a hockey puck at 50 degrees, but which flows more like conventional oil once heated. (Jennifer A. Dlouhy / The Houston Chronicle)

Environmentalists and landowners who oppose Keystone XL, say there would be the potential for spills all along the pipeline route and insist that the diluted bitumen (or “dilbit”) is more corrosive and harder to clean up than alternatives.

In a petition filed with the federal government on Wednesday, a coalition of environmentalists and landowners are asking regulators to develop new mandates for oil sands pipelines.

Oil sands crude is “highly corrosive and toxic, so when pipelines rupture, it is nearly impossible to clean up,” said Michael Marx, director of the Sierra Club’s Beyond Oil campaign. “Under the current standards for tar sands pipelines, it’s not a question of if a spill will occur, but when.”

TransCanada has countered that dilbit is no more corrosive than conventional crude oil.