Canada’s refiners warn that schemes to add value to oil at home are likely uneconomic

In a world that doesn’t need an energy superpower, turning Canada into an energy superpower is bound to become a challenge. The major fossil fuel buzzwords are supply glut and demand peak, two trends that suggest another basic trend: weaker and falling prices.  The world energy market is not at that stage yet.  But when OPEC meets next Tuesday in Vienna, the organization that once claimed energy superpower status must begin grappling with the reality that the world is growing ever less dependent on OPEC production.

Demand for OPEC oil is falling, competition abounds, new technologies are proliferating and developing nations from China to Brazil are dramatically expanding production and refinery capacity.  With the expansion of global supply—including shale in the United States and elsewhere — and the shift of demand from developed nations to developing nations, it will become ever more difficult for Canada to fulfill its global energy ambitions, regardless of the dreams of political and industry leaders.

None of this is new, but not all of it has quite registered across the country, which is why the Canadian Fuels Association this week began distributing a report that attempts to keep Canada’s energy prospects in a realistic context.  The report, Tough Questions About the Future of Transportation Fuels in Canada, is aimed specifically at the enthusiasm of some for big mega-pipelines and home-grown refinery projects.

The CFA, which represents Canada’s refining industry, takes special aim at the old nationalist economic argument that the country should be refining more of its oil production at home.  The idea, a favourite of the NDP left but also of the Tory right from the Peter Lougheed school, is that Canada would be better off if it could extract more “value added” out of its energy production. Instead of shipping crude oil to the world, Canada should convert crude into gasoline, diesel and other products by building refineries in Canada.

In Tough Questions, the CFA says this “commonly held belief is not supported by economic analysis.”  To quote from the report’s summary (excerpted elsewhere on this page), “In absolute terms, refining creates immense value; however, in relation to all activities in the value chain, refining’s value-added proportion is the lowest.”

The point in Tough Questions is not that new refineries should not be built or old ones should not be expanded.  Opportunities may develop, perhaps on the West Coast.  But the idea that Canada can automatically set up refineries here and there to handle massive increases in oil output is unrealistic, economically impractical and risky.  The big investment dollars are flowing to oil and gas extraction “because that is where the money is.”

The CFA report is aimed, it seems to me, at bringing some discipline to the refine-at-home activists. But it also serves as a red flag over the pipeline plans that aim to bring billions of barrels of oil across Canada to the East coast.  If the economics and risks associated with refinery expansions suggest there may be no market for the oil once it reaches Montreal or even New Brunswick, then some of the justification for major pipeline expansions becomes questionable.

Moving oil and gas to the West Coast to be refined in British Columbia might make economic sense, although the latest proposals seem to involve government backstops, suggesting economic risks are still significant.

There may be alternatives. Writing on this page the other day, former transport executive Michael Bell proposed a novel export route for Canadian crude. It could be piped a much shorter distance to Churchill, Man., and then moved by tanker to world markets.  Since tankers are the cheapest form of oil transport, Canadian oil could get to market at lower prices compared with the higher cost of moving it via pipeline to, say,  Montreal.

Mr. Bell’s rough proposal — if viable — would accomplish what one oil industry official told me Canada really needs, a cost-effective way to get crude oil to salt water. Once on salt water, oil can then be moved competitively by tanker to points around the world, like a superpower.

Financial Post