Many forces line up against refinery plan

Whatever the flaws in David Black’s plan to build an oil refinery here, I think he has done a service in putting the spotlight on the value-added issue.

It is a reasonable question: why should Canada export crude and settle for those dollars when it can make even more by exporting the finished products?

And creating thousands of construction jobs and then long term jobs in doing so.

Over the last several years prior to my retirement I asked those connected to or knowledgeable about the industry why refineries - or at the very least upgraders - were not being built in Alberta to process the oil sands product.

The answer was always, “The economics don’t work.”

Not a particularly informative response, but there you are.

So in the wake of Black’s announcement I contacted a source who is about as knowledgeable as anyone in the oil patch media.

Noting I had read a story the day before about Japan importing crude and making $4-$6 per barrel on the refined product, I asked him, “So what’s wrong with the economics?”

His response: “Simple answer is that the cost of building a brand new upgrader/refinery is much more expensive than expanding an existing one.”

He pointed out that in the middle of the last decade some oil sands producers had bought outright American refineries to process Alberta bitumen or cut deals with US refiners which saw them take a chunk of ownership as part of increasing the capacity of those facilities.

So while there is much wailing and gnashing of teeth that the US is using its advantage of being the only outlet for oil sands crude to get it on the cheap, some companies at least are receiving the benefits of that “cheap” crude because they are making money at the other end.

In that I found an echo of the never-ending softwood lumber dispute.

BC forest companies such as West Fraser got dinged with punitive penalties on its exports to the US for allegedly being “subsidised” through low stumpage rates.

The US then diverted its ill-gotten gains to American sawmills, including some owned by, you guessed it, West Fraser.

So while the company was getting a kicking on its BC operations, it was getting a windfall in the States.

The swings and roundabouts of multi-nationalism.

Another point he made concerned pricing.

Upgrading/refining here is more attractive only when the price of Canadian heavy oil/bitumen is a whole lot lower than West Texas Intermediate, a US benchmark price.

Conversely, the narrower the price range, the less incentive to upgrade in Alberta.

While the differential is wide right now, the industry expects that to narrow in the future.

So, given the volatility of the differential, spending billions on a refinery in Canada makes no sense.

He made one other point that had occurred to me: why would China, which has been buying into the oil sands and backing the Northern Gateway project, want to import higher cost refined products when they could import diluted bitumen and keep the value-added profit for themselves.

One other factor I’d add is the attitude of the shareholders of the oil-producing companies.

If they are receiving decent dividends each year and the value of the company’s shares is edging up steadily, they are solidly within their comfort zone.

So they are not going to be too enthusiastic about that particular boat being rocked by the expenditure of billions of dollars on a refinery that has a multi-year payback period.

You see that kind of attitude when company A spends billions to take over company B. Invariably company A’s shares immediately dip in the wake of the announcement.

So what’s the solution.

My own knee-jerk nationalistic reaction is why not just slap a hefty export tax on oil sands exports to force the building of refineries here?

The realistic side of me, however, recognises that ain’t going to work in this age of free trade agreements, never mind what retaliatory actions the US would undoubtedly take. That’s a pity.