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To Refine or Not to Refine, that is the question

January 09, 2013

The two earliest oil sands producers, Suncor and Syncrude, mined and then refined the oil sands on site. Typically now producers ship the bitumen to refineries in the US for downstream processing.

Unfortunately for the producers the “crack spread” means they are losing out on billions of dollars in revenues. In the refining business, the difference between what a refinery pays for its inputs (like crude or bitumen) and the price it gets for finished products (like gasoline or diesel) is known as a crack spread. The glut of oil coming from Canadian producers means midwest refineries are enjoying crack spreads up to five times larger than those seen by American coastal refineries, which pay world prices for their feedstock.

As Jeff Rubin notes, “While Canadian oil sands producers are the main victims of this price gap, they’re also, somewhat ironically, its principal cause. Without more pipeline infrastructure to offload oil to other markets, oil sands crude, as well as shale oil from the Bakken play in North Dakota, has no where else to go. More production from these places only boosts supply, further lowering the price of WTI.”

Meanwhile the Alberta Government has become alarmed. So much so that it is investing in a new refinery—it will supply 75 per cent of the bitumen to the refinery as part of a program to help support the province’s oilsands processing industry, while Canadian Natural Ltd. (ticker CNQ on TSX) will supply the rest.

The $5.7-billion first phase of the Sturgeon Refinery, located at Ft.Saskatchewan, near Edmonton, will turn oilsands crude into higher-value products such as diesel and capture carbon dioxide for reuse in the energy sector, is expected take three years to build. Above-ground construction on Phase 1 is slated to begin in the spring. The refinery’s capacity will initially be 50,000 barrels per day but may eventually be tripled to 150,000 barrels per day.

Oilsands giant Suncor Energy Inc. (ticker SU on TSX) says the economic feasibility of the Voyageur upgrader it jointly owns with France’s Total S.A. is “challenged” in the current environment. The companies are reviewing that project, and two oilsands mines, to see if they’ll be profitable enough to move ahead.



The economic dilemma is that raw bitumen is fetching about 1/2 the world price of crude. The cost of constructing refineries in Alberta is very high and problematic in that the markets are far away. There is after all a limited demand in Alberta for refined products.