Savage cites financial risk to Alberta government, but how much revenue already being lost because of pipeline problems, oil curtailment?

Bitumen requires 30 per cent diluent to flow in a pipeline. Figure out how to make the 2 million barrels per of non-upgraded bitumen flow without diluent and roughly 600,000 barrels per day of pipeline capacity would be freed up – the equivalent of a new pipeline. The technology is called “partial upgrading” and Wednesday the Alberta government cancelled its $2.1 billion Partial Upgrading Program. Big mistake.

“These programs rely on grants and loan guarantees, and carry a higher financial risk to government – and ultimately, to Albertans,” the government announced in a press release from Energy Minister Sonya Savage.

Kent Fellows isn’t buying the Minister’s argument. The University of Calgary professor co-authored a 2017 paper examining the economics of partial upgrading, which turns bitumen into heavy or medium crude oil able to be transported by pipeline without being diluted.

Other benefits included $10 to $15 “uplift” in the price received for a barrel of oil by producers; shippers would no longer pay pipeline tolls for diluent or the cost of stripping the diluent from the dilbit at the refinery; and emissions dropped by 17 per cent on the downstream side, which doesn’t address Alberta’s greenhouse gas emissions problems, but is still a bonus for the global atmosphere.

“Is there risk in loan guarantees?” Fellows asked in a tweet. “Yes, but if you have confidence and faith in the industry, and if you take the time to understand these risks (which the Province did) then these can be responsible risks.”

Cenovus Energy, one of the largest oil sands producers, contracted in March with Fractal Systems of Calgary to partially upgrade 50,000 barrels per day. VP of Technology Harbir Chhina told Energi News in an interview that his company uses 40 per cent diluent and has high hopes for Fractal’s “jet shearing” technology.

“We tested [jet shearing at] Foster Creek and Christina Lake [Cenovus oil sands projects] and everything looked really good and it was a very stable product,” he said. “If we could reduce that [from] 40% to 20%, think of all the excess pipeline capability that would be available. So, that technology, we’re really excited about it.”

A 2017 IHS MarkIt study examined the economics of increased refining in Western Canada and concluded that of the options available, partial upgrading offered the most opportunity.

“The most attractive option for growing oil sands production continues to look like the export of heavy sour bitumen blends to U.S. Gulf Coast region which imported over 1.8 million b/d of crude oil of similar quality to the oil sands from offshore places like Venezuela, Mexico and others in 2016,” said Patrick Smith, the study’s co-author and a research associate at IHS Markit.

“But present conditions have oil sands producers searching for new options as well. A key area of interest is what is being called partial upgrading which seeks to improve the mobility of bitumen—reducing the need for diluent used in the creation of bitumen blends—a significant cost for the industry today.”

There are approximately ten companies with partial upgrading technologies in various stages of commercialization. Fractal, as well as oil sands producer MEG Energy’s HIQ, appear to the closest to scaling up for full production. Other technologies face the “Valley of Death” problem, “where a technology shows strong promise but there are impediments and market failures that prevent the resourcing of pilots at a larger scale to de-risk for commercial financing and implementation,” according to Fellows’ study.

This isn’t the first time Alberta has tackled the Valley of Death issue for new oil and gas technologies. During the 1980s, the Alberta Oil Sands Technology and Research Authority funded the underground test facility near Fort McMurray that helped take steam-assisted gravity drainage (SAGD) from the laboratory to the field. SAGD is now the fastest growing form of oil sands production.

“As the manager and steward of the province’s petroleum resources, the provincial government has a role and responsibility to produce policies motivating responsible and economically efficient exploitation of these resources,” said the School of Public Policy study.

The Kenney government has abdicated that role despite lofty election promises to fix the industry’s pipeline capacity problems that led the previous government of NDP Premier Rachel Notley to curtail crude oil production by 325,000 barrels per day at the start of the year.

How much industry revenue is lost because of curtailment? Perhaps more importantly, given Savage’s rationale for cancelling the partial upgrading program, how much royalty revenue is being lost? Surely the certainty of lower revenues today is more pressing than future financial risk created by backing technology that could alleviate pipeline shortage?

Albertans need answers to Fellows’ questions: does the Kenney government understand the risks and does it have the faith and confidence in the oil sands industry it claims to have?

The decision to end support for partial upgrading suggests the answer is “no” on both counts.