November 7, 2009 at 1:12 pm #2894
Published on Friday, Nov. 06, 2009
There is an air of disquiet along the Gulf Coast of the United States, an industrial strip that could have a profound influence on the future of Canada’s oil-fuelled economy.
The refineries that dot the coast represent a major new market that could fuel the expansion of Canada’s oil sands producers, as well as a major pipeline player. And indeed, on the surface, growth appears to be the order of the day. But after a brief golden age, there is a growing fear along refiners’ alley that the bubble has burst.
In the muddy fields adjacent to Motiva Enterprises LLC’s sprawling Port Arthur refinery, teams of contractors toil on stainless steel vessels and refining modules that resemble so many giant Lego pieces, all waiting for assembly in a $7-billion (U.S.) expansion of the plant.
Motiva a joint venture between Royal Dutch Shell PLC and state-owned Saudi Aramco is doubling its refining capacity to 600,000 barrels a day. The site will also add a coker so it can process the heavy grades of crude, such as bitumen from Canada’s oil sands, that make up a growing share of the world’s oil supply.
Because the U.S. is the only export market for Canadian crude, expanded U.S. refineries like Motiva’s are key to Alberta’s ambitions to double, or even triple, oil sands production over the next decade.
But here’s the catch. The Motiva refinery is proceeding only because the company, after weighing discouraging trends in the market, decided not to kill it.
In general, the outlook for total refining capacity in the U.S. is downward pressure, says Motiva’s chief executive officer, Robert Pease.
As new capacity like ours comes on stream, there will be even greater pressure on others to close down eventually.
The U.S. petroleum market is facing what one analysis has called a tsunami of change. The industry faces the unhappy combination of depressed demand, growing competition from foreign refiners and a sector-wide rationalization that will force refinery closings.
Moreover, looming regulatory changes requiring reductions in greenhouse gas emissions will drive up refiners’ costs, particularly for the energy-intensive, emissions-heavy processing of heavy crudes.
We’re facing a lot of challenges, Tom Botts, a senior refining executive from Shell, told a decidedly downbeat industry conference in Houston last week. And not all of us are going to survive the coming shakeout.
From the Canadian perspective, all this adds up to a less-than-sunny forecast. The hopes of oil sands producers such as EnCana Corp. and Shell ride on getting a larger slice of a shrinking pie and those hopes are hobbled by the high environmental cost of oil sands crude. The producers will face downward pressure on bitumen prices as refiners look to pass added regulatory costs to their suppliers.
What’s more, Canadian producers face an array of other countries, from Brazil to Saudi Arabia, that are keen to export to the Gulf Coast, joining traditional suppliers such as Mexico and Venezuela.
Taken together, the U.S. demand and supply challenges raise questions about whether investment in the oil sands will ever reach the peaks that enthusiasts in the sector have imagined.
The article continues to explore
The Refiner’s Dilemma
The Pipeline factor
A ‘tsunami of change’
A cap and trade killer
Port Arthur, Tex. Globe and Mail Update
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