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KNOX – The great pipeline debate: why isn’t more oil refined in B.C.?

Construction work on the Trans Mountain pipeline in 1952. (Image: Trans Mountain)

HERE’S WHERE the economic and environmental arguments clash.

Those who want to ship Alberta oil from B.C. say being shut out of Asian markets costs Canada billions of dollars.

That runs smack into the argument that shipping Alberta’s heavy oil from the West Coast is a disaster waiting to happen. Opponents say an ocean spill of diluted bitumen would be far more damaging than one of diesel, gasoline or other refined products.

The obvious question, then: Why not solve the conflict by refining oil here instead of shipping it abroad?

Because the business case can’t be made, say some. Because B.C. has enviro-protested itself out of the game, say others. Because Canada got left behind in the refinery race years ago and is too far back to catch up.

Pfft, says Victoria’s David Black, who continues to push a proposal for a north coast refinery that he argues would address both the economic and environmental concerns.

OK, first, let’s look at the status quo.

Canada has just 14 fuel refineries today (though a 15th, the Sturgeon facility near Edmonton, is gradually going into production). That compares with the 1970s, when the Great White North had 40 refineries before oil-price shocks prompted a switch to other sources of energy — electricity, natural gas — and forced automakers to produce cars with better fuel economy. As a result, demand fell and smaller refineries closed, says Natural Resources Canada.

Analyst Dan McTeague of Gasbuddy.com also cites moves — acquisitions and mergers leading to monopolies — by Big Oil, whom asleep-at-the-switch Ottawa allowed to concentrate refining in the U.S. at the expense of Canadian fuel security.

Still, Canada actually refines more petroleum products than it consumes. The Prairies and Eastern Canada are largely self-sufficient. The two refineries in Newfoundland and New Brunswick have far more capacity than is needed for domestic use.

The western refineries depend on the oilpatch, but the eastern ones rely largely on crude from Atlantic Canada and abroad. Even if they could get access to Alberta crude — in 2017 TransCanada Pipelines gave up on the proposed Energy East line linking Alberta to New Brunswick — the easternmost refineries aren’t set up to handle heavy oil from Wild Rose Country.

B.C. is the outlier among the provinces, consuming almost three times as much fuel — 200,000 barrels per day, according to the Canadian Fuels Association — as it has the capacity to refine.

The province used to have seven refineries but now has just two, a 55,000-barrels-per-day facility in Burnaby and a 15,000 BPD one operated by Husky in Prince George. Chevron sold its Burnaby operation, which produces gasoline, diesel and jet fuel, to Alberta-based Parkland in 2017.

About half of the refined products B.C. uses travel from Alberta: 50,000 BPD via the existing Trans Mountain line and a similar amount by rail and truck, the fuels association says.

The rest, 30,000 barrels a day, including biofuels, comes from beyond Canada’s borders, mostly from Washington state’s five refineries. There are four within 60 kilometres of Victoria — the Phillips 66 refinery at Ferndale, near Bellingham, the nearby BP refinery at Cherry Point, and the Shell and Tesoro refineries at Anacortes — with a combined capacity of 590,000 BPD.

Note that none of the product from Washington’s refineries is shipped overseas; almost 90 per cent is sold in the U.S., the rest in Canada. Also note that just over half the product travelling through the existing 300,000 BPD Trans Mountain pipe is crude that gets diverted to the Washington refineries via the Puget Sound spur line from Sumas. Effectively, they’re buying our oil and selling it back, refined, at a premium.

So why not build a refinery to service B.C.? Because the North American market as a whole is already over capacity. “We have too many refineries,” says Brian Ahearn, vice-president of the fuels association. Demand for gasoline and diesel is flatlining or declining. Vehicles are more fuel-efficient. Bio-fuels, all of which are imported (most renewable diesel comes from Singapore) have made inroads.

The association’s website puts it this way: “Proposals exist to build modern, high-efficiency refinery operations on the West Coast. The price tag: upward of $15 billion each. The payback period: 25 to 30 years. Although petroleum is expected to remain a key transportation fuel for at least four more decades, an investment of $15 billion comes with significant risks. Which is why there is no rush of investors, private or public.”

Gasbuddy’s McTeague, a former member of Parliament, mentions other factors, including the political climate: The “shenanigans” of pipeline opponents have made Vancouver Island, Vancouver and the coast a “no-go zone” for petro-investment. “Unfortunately, we now have a tattoo branded on our communities.”

Also, when Canada goes out of sync with the U.S. in penalizing refineries for missing hard-to-reach emissions targets, the economics chase business south of the border, he says. McTeague wouldn’t be surprised to see more Canadian refineries close.

Even without the political/environmental hurdles, the business case isn’t great, he says. “The economics of building refineries are not the best.” There’s not enough of an internal market, or enough of a distribution network in place, to warrant the investment. (Note that Alberta’s new refinery went ahead only with provincial government guarantees.)

OK, the domestic market isn’t great, but what about the foreign market? The whole point of the Trans Mountain expansion, adding 590,000 BPD capacity to the existing 300,000, is to allow greater access to the Pacific Rim.

Trans Mountain itself says market conditions will determine where — B.C., Washington, California, Asia — the heavy oil from the new pipeline ends up, but most is expected to go “for export off the dock.” The industry has its eyes across the Pacific.

“The opportunity is Asia and India,” Ahearn says.

If that opportunity exists (pipeline opponents doubt it does) is it to sell those countries refined product, or just unrefined diluted bitumen? If it’s the former, there would be competition from the big refineries on the Gulf Coast and elsewhere in the U.S. that are already rigged with the expensive cokers and other gizmos that are needed to handle heavy oil (heavy oil might be expensive to process, but it’s more versatile than light, tight shale oil).

That’s not to mention competition from the refineries in Asia itself. India, which plans to increase its refining capacity by 77 per cent over 12 years, has one complex whose capacity is 60 per cent that of all of Canada.

“The question is: Can a Canadian refinery make refined product, ship it over there and land it at a competitive price?” Ahearn asks.

David Black believes the answer is “yes.” Since 2012, the Victoria businessman has been pushing a proposal for a refinery in northern B.C., one that he believes would allay many of the fears surrounding the shipment of diluted bitumen from the coast.

Sited 13 kilometres north of Kitimat, the Kitimat Clean refinery, when fully built out, would be one of the largest refineries in the world. When announced, the goal was to process 400,000 barrels of pure bitumen from Alberta’s oilsands into 460,000 barrels of gasoline, jet fuel and diesel fuel, plus byproducts such as butane, propane and sulfur pellets. The price tag has ranged from $22 billion down to, more recently, $18 billion.

Actually, it’s lower than that, since these days the focus is on building the first phase of the project: an $8.5-billion facility with a capacity of 125,000 BPD.

It’s being championed as the world’s cleanest refinery for three reasons.

First, shipping refined fuels instead of dilbit means there would be no fear of tar-like goop sinking and paving the ocean floor after a tanker spill (though pipeline proponents scoff at that spectre).

Second, plans include processing technology that would cut greenhouse gases by two-thirds when compared with other heavy oil refineries.

Finally, proponents say Kitimat Clean wouldn’t require a pipeline (it better not, because Justin Trudeau has already killed the controversial proposal to build the Northern Gateway line from Alberta to Kitimat). Instead, the idea is to pipe the dilbit from the oilpatch to another Alberta site, then turn it into dry pellets by sucking the diluent from it. The pellets would be shipped to the refinery in hoppers by train. Any spill could be cleaned up with a backhoe, just like coal.

The advantage of Kitimat’s location is its proximity to Asia. Proponents say it would take a tanker doing 12 knots three weeks to cross the ocean from Kitimat to Shanghai. The same slow boat to China would take nine weeks from Houston, Texas. That’s in addition to the month it would take for the oil to ooze through a pipeline from Alberta to the Gulf Coast. By comparison, a train could carry bitumen from Alberta to Kitimat in a day.

That’s a big deal, as shipping costs are one reason Alberta oil sells for less than similar oils go for elsewhere.

That leads to another obvious question: Why not built the refinery in Alberta instead of in B.C.? The answer: the cost.

To be affordable, a refinery would have to be built in a high-tech, low-wage country like China, Taiwan, Malaysia or South Korea, then shipped in gigantic modules for assembly on the West Coast. To illustrate that point, compare the estimated $8.5-billion cost of phase one of the 125,000 BPD Kitimat Clean refinery with the $9.7 billion spent on construction of the new 50,000 BPD bitumen-to-diesel Sturgeon facility in Alberta.

Where does all that leave us? Waiting. B.C. politicans have expressed enthusiasm for Kitimat Clean, but the federal Liberals — the ones with the power — haven’t. The project needs petroleum producers to sign off on it, too.

Jack Knox is a born-and-raised Kamloopsian who once worked at the Kamloops Daily News. He is now a columnist with the Victoria Times Colonist. Since joining the Times Colonist in 1988, Jack has worked as a copy editor, city editor, editorial writer and editorial page editor. Prior to that he was an editor and reporter at newspapers in Campbell River, Regina and Kamloops. He won the Jack Webster Foundation’s City Mike Award for Commentator of the Year in 2015.

 © Copyright Times Colonist

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About Mel Rothenburger (6189 Articles)
ArmchairMayor.ca is a forum about Kamloops and the world. It has more than one million views. Mel Rothenburger is the former Editor of The Daily News in Kamloops, B.C. (retiring in 2012), and past mayor of Kamloops (1999-2005). At ArmchairMayor.ca he is the publisher, editor, news editor, city editor, reporter, webmaster, and just about anything else you can think of. He is grateful for the contributions of several local columnists. This blog doesn't require a subscription but gratefully accepts donations to help defray costs.

1 Comment on KNOX – The great pipeline debate: why isn’t more oil refined in B.C.?

  1. The convergence of AI for self-driving cars, EV’s, and renewable energy will likely mean demand for gas and diesel will decline dramatically before either a refinery or the disputed pipeline can be completed. Neither are likely to be a good investment.

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