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Working the Canadian Heavy Oil Problem

Often facts become obvious well before the industry takes the action suggested by the factual revelation. Usually the deterrent to acceptance and meaningful action is simply denial of an impending negative outlook. Such is the case of the Canadian Oil Sands industry and the IMO 2020 impact. Initial warnings have been repeatedly denied - whistling past the graveyard comes to mind - and even as the date of reckoning rapidly approaches, denial is still more in vogue than remedial action.

The highly regarded publication, Daily Oil Bulletin, published the article "Brimstone Blues: Oilsands Producers Could Feel Impact Of New Global Sulfur Regulations” almost two years ago when the IMO ruling was finalized. The article stated "Alberta oil sands producers need to take action sooner rather than later to minimize the potential for shut-in production before new global limits on the sulfur content of ship fuel take effect in 2020, says a veteran energy consultant.

The new sulfur limits also will lower heavy oil prices and increase competition between heavy oil-producing jurisdictions, William Edwards, who has been president of Houston-based Edwards Energy Consultants since 1979, told the Bulletin. The “bottom line” is that Canada will have to shut-in some of its production unless it can get the asphaltenes out of its crude, he said."

Softening this warning, the article reported that "Dinara Millington, vice-president of research at the Canadian Energy Research Institute (CERI), said she “wouldn’t go as far as to say” the low sulfur regulations could shut-in Canadian production.” Recently, however, in reporting on the results of a more recent study by CERI, the Daily Oil Bulletin, in the recent article "New Low Sulfur Marine Standards Create Refining Opportunity”, stated that the "New low-sulfur marine fuel standards could prove to be disastrous for the Canadian oil producing sector.”  While the CERI report does not specifically suggest shutting in Canadian production, the price discounts that they present reduce the Oil Sands production netback to levels that do not justify production.

Two years’ time has already been lost. If that delay continues for an additional two years, prolonging the discount for Oil Sands production of $16-20/B, as suggested by CERI, the delay will have cost the industry $23-29 Billion. Further delay will add $32 million loss for each day’s delay.

Canada needs to take two important steps. 1) Accept the reality that there is an impending catastrophe and 2) Marshall the county’s resources to transform oil sands into a globally acceptable quality. Essentially that means removing the asphaltene component, the element that prevents economic desulfurization of the crude.

We have considered the Canadian situation from an “outside in” viewpoint rather than the common “inside out” view of Canadian analysts. The result gives practical guidance as to steps that the Canadian industry might consider as it struggles with severe price discounting for its heavy oil production.

Global balances show an advancing oversupply capability for the heaviest crude types. This oversupply will be dramatically exacerbated when the sulfur regulation for marine bunkers is lowered in 2020 by the International Maritime Organization (IMO) from 3.5% to 0.5% sulfur. Most estimates suggest that about 2 million barrels a day of additional heavy, high sulfur oil will need to disappear from the supply system to accommodate this change. Realistically speaking, this reduction in supply can be remedied only by a substantial reduction in production of the heaviest crude types. This puts the onus squarely on Canadian Oil Sands as the prime target for reduction. Demand for Canadian heavy oil may drop by more than a million barrels a day.

This necessary reduction in heavy crude supply will require an increase in light crude production to balance the system. The net result of this crude switch will alter the balance for motor fuels in the global demand picture. Directionally, this switch may cause an oversupply of the lighter components, which will alter refinery operations, such as cracking, and reduce refinery profits.

The recent study by the Canadian Energy Research Institute (CERI), regarding the expected IMO impact, described the challenge facing the Canadian industry. Although time and budget considerations prevented CERI from quantitatively addressing foreign supply competition, it did mention that traditional Canadian refinery markets in the United States would be subject to new non-North American competition as unwanted high sulfur residues from the Eastern Hemisphere sought a home. Much larger price discounts for Canadian heavy crude are expected.

From an overall perspective, Canada needs to transform its heavy crude output in a cost efficient manner without exacerbating the light product oversupply. Conventional high intensity processes, such as cracking or coking of Canadian bitumen, are much too expensive to compete in the world markets. Further, these processes basically convert the heaviest portion of the barrel into the lightest components, exactly what the world does not need. What is needed For Canadian heavy oil production to be maintained is to simply remove the sulfur from the heavy components and retain the light/heavy product balance. One economical manner to accomplish this action with Canadian bitumen is to remove the asphaltene component from the oil in a low-cost process, followed by subsequent removal of the unwanted sulfur. Recently patented technology, Selex-Asp, allows this step to be accomplished economically. The fact that this process is operating commercially in Chinese refineries suggests that prompt installation in Canada is possible. In conjunction with asphaltene removal, development of superior desulfurization catalysts may provide other desulfurization options.

The ideal solution for the Canadian industry would be to transform the heavy oil currently being used as 3.5% S fuel oil into the desired 0.5% S product. Asphaltene removal allows this action to be accomplished.

Implementation of economical asphaltene removal would create four distinct benefits:

·    Avoid the need for shut in capacity 

·    Avoid a potential oversupply of lighter products 

·    Free up pipeline space by eliminating the current diluent method for bitumen shipments

·    Sequester 20% of the carbon production and 30% of the sulfur in bitumen

A road map for the way forward is critical for the Canadian industry. The government and industry leaders need to objectively examine the IMO impact and take immediate remedial actions to protect the viability of the oil sands industry.

 

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