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Energy East: Or Value-added Refineries?

by John Brian Shannon | April 9, 2016

The Energy East pipeline only makes sense if global oil prices rise past $80 per barrel and there’s no guarantee we’ll see anything like that before 2020.

Crude oil Forecast 2016-2020 by Trading Economics

Crude Oil forecast 2016-2020: Crude oil is expected to trade at $35.00 per barrel by the end of this quarter, according to Trading Economics global macro models, and analyst expectations. Looking forward, we estimate it at $29.50 in 12 months’ time.

Meanwhile, Iran is set to add 3.5 million barrels per day by 2020 to the global oil markets which will easily meet (practically) flat demand, keeping oil prices below $80/bbl.

Not only that, Iranian crude oil is either #2 (sweet) or #3 (sweet) while Alberta’s oil ranges from #4 (sour) to off-the-scale sour. Alberta’s crude is so sour that it must be blended with #3 (sweet) or better before refineries will accept it.

A typical Alberta oil rig. Image courtesy of MACLEAN'S.

A typical Alberta pumpjack. Image courtesy of MACLEAN’S

Why would any refinery want to buy Canadian sour crude when they can buy Saudi #3 (sweet) or Iran #3 (sweet) for the same, or lower price? Alberta’s crude sits at an average of #4.75 (sour) with two other negatives attached — much higher extraction costs (the average Alberta extraction cost is $56.20 per barrel) along with higher refining costs.

Investopedia primer on the petroleum industry

What would capture the interest of voters, would be the Alberta government guaranteeing the financing of oil refineries located within and sized to accommodate the needs of each Canadian province.

Each province could have it’s own refining capacity sufficient to meet 100% of annual provincial demand — plus 30% (for export) to bordering U.S. states.

Existing rail links can already get the crude oil to existing refineries and to the future refineries proposed in this blog post. For those worried about oil spills when shipping by rail, they are usually limited to a few rail tanker cars and are microscopic when compared to pipeline spills.

Instead of being ‘hewers of wood and drawers of water’ how about some value-added contributions to our economy by building our Canadian refining capacity, and doing some much needed value-adding to our petroleum exports?

It’s the next logical step for the Alberta government.


Bonus Graphic courtesy of MACLEAN’S

In 2005, the resource sector contributed 40% of Alberta government revenue. It has fallen to 6%.

Energy East pipeline: Good case, or lost cause? In 2006, the Alberta resource sector contributed 40% of provincial government revenue. It has fallen to 6% in one decade and is still falling. Image courtesy of MACLEAN’S.

How Alberta Could Counter Low Oil Prices

by John Brian Shannon | December 28, 2015

Through no fault of their own, the Alberta government headed by Premier Rachel Notley is facing economic crisis due to the lowest global oil prices in years, and with lower prices ahead it goes without saying that Premier Notley and her new government need to either (a) cut spending or (b) boost government revenue.

If boosting government revenue is chosen, economists know there are only three ways for provincial governments to boost revenues;

  • Raise taxation revenue
  • Raise non-taxation revenue
  • Transfers from the federal government

Let’s forget about putting any more holes in the Alberta economy via increased taxation as the province’s economy is under enough stress since the oil price crash.

Let’s also rule out the return of higher oil prices as oil prices are settling in for a long term run in the $30.-50. per barrel range. Why rule that out?

Simple. Millions of barrels of formerly sanctioned Iranian oil are about to hit the market, hard

For nearly a decade, Iran was sanctioned by Western nations and able to sell only small amounts of oil in the global marketplace. But the sanctions didn’t stop Iran from continuing to develop its oil industry, nor did it stop Iran from buying every spare oil tanker and storing their crude at sea, and in thousands of oil storage tanks on land until sanctions ended.

All of which is about to hit the global oil market.

‘Ready to Ship’ is perhaps an understatement as the sanctions scored a direct hit on the Iranian economy, consequently the country is very motivated to resume normal trade.

And let’s not forget the ‘wellhead price’ of oil in all of this

At the Alberta oil sands, the average extraction price for a barrel of crude oil is $56.20. That’s the average price. At some locations the extraction price can surpass $90./bbl.

In Saudi Arabia, still the world’s largest single oil producer, the wellhead price ranges between $14./bbl and $24./bbl (for #3-4 crude) and they can stand $40./bbl oil prices indefinitely. The Saudi producers don’t care how much the oil speculators are making, as long as the price remains somewhat over $24./bbl, they’re seeing profit.

But in Iran… wait for it… the wellhead price ranges from $1./bbl to $21./bbl and they have the world’s fourth-largest proved oil reserves.

Cost of oil production

Cost of oil production (Due to sanctions at the time this chart was created Iran wasn’t included in the data) Image courtesy of Der Spiegel

Most Alberta oil may be best termed #4 (sour) on the pH scale, tar sands oil can only be called #4.5 or #4.75 and all Alberta crude oil is so sour that it must be blended with liberal amounts of Saudi #3 (sweet) or West Texas Intermediate before any refinery will accept it.

Much of Iran’s oil is of the #3 (sweet) variety, but unlike the situation in other oil-producing nations where most of the #2 (sweet) crude oil was extracted long ago, Iran ranks a close 2nd to Saudi Arabia in proved reserves of #2 crude oil — a perfect match to blend with Alberta’s sour crude.

Therefore, plenty of sweet and cheap-to-produce Iranian oil is about to arrive on the scene and I wouldn’t be surprised to see oil dipping to $28./bbl for a week or two once Iran’s oil exports begin impacting the market.


With the foregoing in mind, let’s look at three ways to boost the Alberta economy:

1. Alberta can still retain its ranking as an energy superpower in the coming decade of depressed oil prices by adding hundreds of wind turbines to the many wind corridors in the province

The  Highway 2 corridor starting at the U.S. border heading north to Edmonton (and perhaps as far north as Athabasca) consists of rolling farmland with excellent wind potential. Any Albertan can tell you about the year-round winds native to that corridor, although they may not refer to it as a ‘wind opportunity’ in the same glowing terms as a wind turbine salesperson might…

Wind Farm Installation in Germany

Typical Wind Farm Installation in Germany. Image courtesy of Phillip May.

Farmers can benefit by allowing wind turbines to be installed on their land.

Each wind turbine requires one acre of land (including service road) which makes that land unavailable for crops, therefore, utilities typically lease the land at $4000. per year/per unit.

Some farmers may allow five, ten, or any number of wind turbines on their property.

And good for them! They lose the ability to grow crops or graze their livestock on a fraction of their land, but unlike cash crop income, the wind tower lease payments are guaranteed regardless of the drought or flood situation.

And that non-weather-dependent annual revenue helps to stabilize farm income.

GE Space Frame Tower

GE Space Frame Tower is a complex metal frame covered by fibreglass fabric. Image courtesy of GE.

The typical wind turbine produces 1 MegaWatt(MW) of clean electricity and cost about $1 million apiece, although the newer (and more costly) wind turbines produce 2 MW.

Day or night, wind turbines produce reliable, clean electricity especially when situated in wind corridors and installed atop 100-200 metre towers. (Taller towers get better wind)

By selling GigaWatts(GW) of clean electricity to residents, businesses, industry, and via electricity exports to British Columbia, Saskatchewan, and to the northern United States, Alberta would retain its place as an energy superpower — regardless of the global oil price.

And we must always heed the words of Saudi Oil Minister, Ali Al-Naimi, “The Stone Age didn’t end on account of a lack of stones, nor will the Oil Age end on account of a lack of oil.”

The end of oil is coming. We need to begin planning for it. An energy grid that meets demand with 50% natural gas and 50% renewable energy and is strongly geared towards electricity exports is in our best economic and employment interests. The sooner we begin to walk that path, the farther ahead of other regional economies we’ll be.

Or, Alberta could drop the ball completely and become an energy importer from places like British Columbia, Saskatchewan, and the northern U.S. states. That might be a little too ironic for some Albertans.

Jobs created per energy type. Image courtesy of IRENA.

Power plant jobs created per energy type. Image courtesy of IRENA

A great way to create thousands of good-paying jobs in Alberta, not only installer jobs but wind turbine and tower manufacturing jobs, is by negotiating with wind turbine manufacturers, and separately, wind tower manufacturers, to build assembly plants in Alberta.

If all the stars aligned, the province could become the defacto capital of Canada for wind turbine and wind tower manufacturing.

And the province has the potential to become an important centre for wind power technologies, by providing the proper funding to the Northern Alberta Institute of Technology (NAIT) and the Southern Alberta Institute of Technology (SAIT).

There isn’t a reason good enough to prevent Alberta from installing 1000 wind turbines per year within its provincial boundaries AND selling another 1000 wind turbines and towers per year to other jurisdictions in Canada. That’s just the Canadian market, and quite separate from the true north strong and free there’s a big windy world out there.

More jobs, guaranteed income for farmers, cleaner air via clean electricity generation, a better economy due to massive electricity exports and higher tax revenues… what’s not to like about wind power in Alberta?

2. Natural Gas as a baseload energy fuel

Due to historical factors, such as the historically low cost and low technology required to produce heat and electricity from coal, (and also due to the low price of massively-subsidized nuclear power) natural gas became a sort of ’boutique’ fuel used to produce power at so-called ‘peaking’ power plants.

Henry Hub gas price to January 2016.

Henry Hub gas price to December 2015. Prices are projected to continue dropping. (At less than $2.00 natural gas becomes competitive with coal-fired power generation) Image courtesy of Plattts

Whenever the coal or nuclear power plants couldn’t meet peak demand, say during summer afternoons when every air conditioning unit was working at maximum capacity, peaking power plants could quickly ramp-up to meet peak demand.

Natural gas power plants can ramp-up or down in minutes, as opposed to coal-fired power generation or to nuclear powered generation, which can take hours or days to ramp-up or down.

With much lower natural gas prices (below $2.00 on the Henry Hub index as of 12/28/15) a huge window of opportunity exists for non-centralized natural gas-fired power generation to enter the energy market as an equal player instead of as a pinch-hitter.

Due to ever-stricter clean air standards and the concerns surrounding global warming, and the obscene water usage of coal-fired and nuclear power plants, natural gas looks to replace coal and nuclear saving billions of subsidy dollars in the process.

Water usage by type of power plant.

Water usage by type of power plant.

Use a cleaner fuel for a cleaner burn

Modern natural gas-fired power generation releases less than half the amount of CO2 as compared to coal-fired power generation.

And that’s just the story on Carbon Dioxide emissions.

It’s the other emissions that are the real problem with coal-fired power generation; It’s things like airborne mercury and heavy metal vapours, sulfur dioxide, oxides of nitrogen and particulate (smoke, ash, and soot) that are the real nasties.

Then there are the thousands of tons (Alberta only) or millions of tons (globally) of fly ash that must be transported and safely buried annually, far from aquifers.

The good news is that natural gas burns up to 1,000,000 times cleaner than brown coal (lignite) and up to 10,000 times cleaner than the cleanest-burning grade of coal (anthracite).

“Each stage in the life cycle of coal—extraction, transport, processing, and combustion—generates a waste stream and carries multiple hazards for health and the environment.

These costs are external to the coal industry and are thus often considered “externalities.”

We estimate that the life cycle effects of coal and the waste stream generated are costing the U.S. public a third to one-half of a trillion dollars annually.

Many of these so-called externalities are, moreover, cumulative.

Accounting for the damages conservatively doubles to triples the price of electricity from coal per kWh generated, making wind, solar, and other forms of nonfossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive.” — Harvard Medicine | Full Lifecycle of coal

As for matching up with wind power, there isn’t a better partner than natural gas-fired power generation. In perfect harmony, natural gas can ramp-up and ramp-down on a minute-by-minute basis to meet Alberta’s electricity demand and can add capacity to electricity exports.

3. Promote Alberta Tourism in a Massive Way

Until now, provinces like British Columbia, Ontario, and Quebec have dominated the Canadian tourism market. And millions of tourists visit British Columbia without ever knowing about the jewel of a province next-door. That must change in 2016.

BC and Alberta must become partners in attracting tourists by launching complementary tourism campaigns in foreign countries — making it seem to prospective tourists that there are so many reasons to visit Western Canada that they decide to visit both provinces and forego travelling anywhere else.

In what other country can you take a cruise ship to a major cosmopolitan city like Vancouver, golf in the morning, ski in the afternoon, enjoy fine dining at night, then hop onboard a scenic VIA RAIL train to Banff, Alberta?

There you can enjoy ice-skating, snowboarding and cross-country skiing or nature hikes, and of course, more fine dining.

Fly-fishing in Alberta.

Fly-fishing in Alberta. Image courtesy of TheRealBanff.com

Don’t forget fly-fishing on the Bow River. Or golfing in Kananaskis Country? Maybe dig up some dinosaur bones near Drumheller.

How about taking in some of the many festivals in Edmonton or Calgary?

Or stay at a working ‘Dude Ranch’ in Bragg Creek rounding-up cattle and wearing your best cowboy hat.

Horseback riding in Alberta

Horseback riding in the Alberta Rockies.

Each $1.00 spent to boost tourism typically returns a minimum of $6.00 making investments in tourism de rigueur for governments wanting to provide jobs and increase government revenues.

Compared to energy megaprojects which take years to ‘break-even’ investment returns from tourism typically happen within 24 months.

Banff, Alberta in Winter

Banff, Alberta in Winter

Of the easiest and surefire ways to stimulate the Alberta economy, this is likely it.

Tourism requires a relatively small annual investment, a medium-sized commitment from the government, and features a 6-to-1 payback within two years. Not bad.

Although not as large as other segments of the Alberta economy, tourism pays back quickly and requires only moderate effort on the part of the government.

Snowboarding Alberta.

Image courtesy of Travel Alberta

I hope Premier Notley makes tourism one of the first priorities of her government in 2016 — even as she works out longer-term and higher reward arrangements to secure a better energy future for Alberta.


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