Natural gas upgrade of bitumen could relieve Alberta's oil pipeline bottleneck

They say necessity is the mother of invention.

Alberta is struggling to get its oil to market. It's been a challenge to get a new export pipeline built. Sowhy not try to squeeze more oil through existing pipelines. That is probably the most notable changesuggested in the recent Alberta royalty review. It's also the section left incompleteas the panel membersran out of time.

The panel argued that one of the best ways to increase royalties would be to create a market for natural gas inside the province and, at the same time, possibly free up covetedspace in oil export pipelines.

It just adds to the arsenal in Alberta.Dave Mowat, royalty review panel

The royalty review report suggests using natural gas to partially upgrade oilsands bitumen to remove some of the heaviest elements of the material. The process would allow bitumen to flow easier in a pipeline with little or no diluent, the substance currently used to improve the movement of bitumen. Partial upgrading would increase the capacity of export pipelines by as much as 30 per cent, the portion taken up bydiluent.

"Theoretically it increases your pipeline capacity you are sending all bitumen," said panel member Dave Mowat, the chief executive of ATB Financial."It just creates a little different product and fits into more refineries than bitumen."

It sounds like a no-brainer. Use an abundant supply of natural gas to upgrade bitumenand free up pipeline space. Upgrading facilities create jobs and government royalties would likely increase.

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The drawbacks are the lack of details by the review panel and the estimated $300million thegovernment would have to spend to "accelerate thecommercialization of partial upgrading technologies," stated the report. Mowatdescribed that level of investment as reasonable to begin partial upgrading of bitumen.

"It's not going to change the world, but it's important. It just adds to the arsenal in Alberta," said Mowat.

Value creation

The idea is part of a broader suggestion that the government should try to diversify by promoting value-added processing in the province.

"While these recommendations are not directly about Alberta's royalty framework, they would have a significant impact on the ability of Albertans to realize further returns on our resources," stated the report.

Natural gas prices are at exceptionally low levels. Prices averaged about $7.50 US/MMBTU in 2006and 2007before spiking above $12 in 2008 and then falling ever sincedown to current levels just above $2.

In the past, Alberta relied on natural gas for the majority of its royalty revenue, but with the change in commodity prices in recent years, the oilsands now contributes the most to provincial coffers. Prices fell as the U.S. shale gas boom drastically increased production and simultaneously causedAlberta's biggest customer to largely disappear.

Strategy needed

That's why the review panel suggests a natural gas strategy.

"There's only so much we can do in four or five months. It was an exceedingly tight timeline," said panel member Peter Tertzakian, chief energy economist atARC Financial. "We know there was more to do with the diversification."

Creating a market in Alberta for natural gas could come in many different forms. Already it is used in electricitygeneration,and that could expand as the provincial government accelerates the phase-out of coal power plants.

This week, the governmentannounceda $500-million royalty credit program to build petrochemical plants to turnmethane and propane gas into materials such as plastics and textiles.

"I'm really encouraged to see the province talking that way, that they really want to move to more of a natural gas fuelled economy," saidDarren Gee, chief executive of Peyto Exploration and Development, a Calgary-basednatural gas producer.

He wonders whether using natural gas to upgrade bitumen, for example, is the right direction for Alberta.

"We can definitely put more of it to use in the province, but I guess the question is do we want to use up all of our gas to get all the oil out or do we just want to use our natural gas?" Gee said. "A leaner, cleaner, more efficient fuel. Why don't we convert more of our consumption to it?"

Overall, the Alberta royalty review recommendedfew changes for the oil and gas industry. The government's royalty revenue will not increase in the coming years and the oilsandsrates were untouched.