Markets hunger for Canadian bitumen, not refined oil – by Brian Lee Crowley (Globe and Mail – October 4, 2013)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

What is it about Canada’s natural resources that make normally sensible people take leave of their business and economic senses and clamour for policies that sound good, but a moment’s analysis reveals as a fraud and a chimera?

Natural-resource nationalism, the idea that “our” natural resources should go through every stage of processing within Canada, is one such policy. People as diverse as author Jeff Rubin, West Coast newspaper publisher David Black, trade union leaders, consumer advocates and many others believe Canada is somehow “losing out” when it exports bitumen from the oil sands, for example, rather than refined products like gasoline and jet fuel. Many of them look at the discount on Western Canadian oil and, misunderstanding its significance, agitate for that oil to be shipped east where it will prove a boon for consumers.

Both ideas are quite wrong.

Take the oil sands, for example. The oil sands do not produce oil, but a tarry sandy substance called bitumen, which contains oil. To refine the bitumen, you need to upgrade it to a refinable state (so-called synthetic crude); that takes either an upgrader or a coker. To make refined products, then, is an expensive two-stage process compared with ordinary crudes that can go straight to refining.

Even that suggests that one crude is easily substitutable for another. Not so. Refineries are generally designed to handle a particular crude, or more often a blend of crudes with specific characteristics, like their sulphur content. To change from one crude to another often requires a complex and expensive refinery refit.

Put all that in the context of an open North American market for refined petroleum products in which demand has been falling, not rising, uneconomic refineries have been closing (four in North America last year alone) and those remaining have been increasing their capacity to capture economies of scale and compete with imports. Cheap refining capacity, in a perfect illustration of the power of globalization, has been under construction in Asia, with North America part of its target market.

The people who are promoting more refining in Canada are therefore doing so in the face of excess local refining capacity that is not especially competitive against rising Asian refiners. These are hardly propitious circumstances in which to build new refineries, or even to spend the billions necessary to wean Eastern Canadian refiners off imported oil and on to bitumen. There are no upgraders east of Alberta, and only one refiner, Imperial in Sarnia, Ont., has a coker.

For the rest of this article, click here: