GLOBE AND MAIL:
Print Edition 31/07/07 Page B1
RESOURCES: EXPANDING IN THE OIL SANDS
Shell unveils plan for biggest upgrader
Proposal could cost up to $27-billion as price of refining Alberta's heavy crude continues to climb
July 31, 2007
CALGARY -- Royal Dutch Shell PLC is planning construction on the largest oil sands upgrader to date, even as other firms delay or cancel their own projects in the face of spiralling costs.
According to preliminary cost assessments made in a regulatory application filed yesterday, the new Scotford 2 upgrader, which would process up to 400,000 barrels a day of bitumen produced from Shell's oil sands projects in northern Alberta, could cost between $22-billion and $27-billion.
A final investment decision on whether to go ahead with development is expected in 2009.
Previously, the Fort Hills development, which is being developed by a consortium led by Petro-Canada and estimated to cost $26.2-billion in total, was the most expensive single project yet proposed.
"Our Scotford Upgrader 2 development plans reflect a long-term, continuous development path in the Scotford area," said Brian Straub, Shell's senior vice president of oil sands.
Because upgraders are extremely expensive to construct, especially in Alberta's over-heated economy, there has been no consensus on how companies should best deal with their future output. While Shell, Petro-Canada and Suncor have determined that constructing upgraders within Alberta is the best solution, other companies have not.
Instead they have delayed a decision or pursued alternatives, such as convincing U.S. refiners to retool their facilities to take more heavy crude.
Last year, EnCana Corp. struck a deal with U.S.-based ConocoPhillips Co. that saw the companies exchange oil sands and refining equity, while Husky Energy Inc. bought a refinery in Lima, Ohio, where it hopes to process some of its future oil sands output. Synenco Energy Inc. put itself up for sale in June, saying it couldn't afford to build its Northern Lights upgrader and oil sands project.
The huge scale Shell's potential investment adds to the sizable projects already being developed in Alberta by the company, which completed the $8.7-billion takeover of its Canadian subsidiary, Shell Canada Ltd., earlier this year. The company is ultimately seeking to increase its output from the Athabasca Oil Sands Project (AOSP), which now produces 155,000 barrels a day, to 770,000 barrels a day, and also plans to develop other in situ production at its holdings at Peace River and Cold Lake.
In consortium with partners Chevron Corp. and Western Oil Sands, Shell is currently expanding the AOSP by another 100,000 barrels a day at a cost of between $10-billion and $12.8-billion. While the project comprises both a mine and an upgrader, once that expansion stage is complete the partners have agreed to pursue separate solutions for processing output from future expansions of the plant, meaning Shell now needs to develop independent upgrading projects.
If approved, the new Scotford Upgrader 2 would be built in four separate 100,000 barrels a day stages, with the construction of the first starting in 2009 and finishing in 2012. At peak, each phase would require between 3,000 and 4,000 construction workers, and the final stage isn't expected to be complete until between 2022 and 2027, said Shell Canada spokeswoman Janet Annesley.
With production from the oil sands set to triple from current levels of around one million barrels a day by 2015, the question of what to do with that extra output has vexed oil companies in Alberta.
The problem lies with the nature of bitumen, the heavy form of crude produced from the oil sands which is not only expensive to transport but must also be diluted with a lighter crude product called condensate to make it flow through a pipeline. In addition, it's also difficult for many refineries to processbitumen, reducing demand for the product and limiting its potential destination to only a select group of refineries specially designed to take very heavy crude.
One possible solution is to construct upgraders - sprawling industrial facilities where the sand in the bitumen is stripped away from the oil, improving it into which is improved into what's called synthetic crude, a lighter form of oil that can be processed by more refineries, and so fetches a higher return than bitumen.
Royal Dutch Shell
Close: $77.94 (U.S.), up 65¢
Selected upgrading projects
Shell: Scotford, 155,000 barrels a day. Currently being expanded to 255,000 b/d.
Suncor: Athabasca, 260,000 b/d. Currently being expanded to 350,000 b/d.
Syncrude: 350,000 b/d
Canadian Natural: Horizon. Phase 1 expected to produce 110,000 b/d and be in service in 2008. More stages expected in future.
BA Energy: Heartland. Phase 1 of merchant upgrader to produce 77,500 b/d, expected on stream in 2008 at cost of $900-million. Facility could ultimately produce 260,000 b/d by 2013.
OPTI Canada/Nexen Inc.: Long Lake. First 60,000 b/d stage of project, which includes an upgrader, expected on stream this year.