Challenges Remain for New Investments in Heavy Oil Processing in Western Canada Despite Significant Changes in Oil Markets, IHS Markit Study Says

CALGARY, Alberta–(BUSINESS WIRE)–Despite market changes, including some to the benefit of heavy oil
processing in recent years, challenges still remain for investing in new
heavy oil processing capacity in North America, says a new study by
business information provider IHS Markit.

Entitled A New Look: Extracting Value from the Canadian Oil Sands,
the Oil Sands Dialogue report presents a post-oil price collapse update
to a 2013 analysis on the economics of processing heavy oil in Alberta
and other select jurisdictions. The oil market has experienced major
past and potential pending changes, most notably cost deflation since
the 2014 oil price collapse and a pending shift in marine fuel
specifications that has the potential to improve the economics of
processing heavy oil. The IHS Markit report says that despite these
changes, the abundance of light, tight oil continues to challenge
investments in heavy oil processing in Western Canada.

The report concludes that, with growth expected to continue (albeit at a
slower pace), the preferred option may continue to be exporting bitumen,
rather than investing in heavy oil processing.

The study examines three investment options to process heavy
oil—upgraders, refinery conversions and constructing entirely new
refineries:

Under the first option, upgrading facilities convert oil sands bitumen
into light, synthetic crude oil (known as SCO) that competes for
refinery space with light sweet crude from growing U.S. tight oil
supply. The other two options—refinery conversions and new
refineries—involve either adapting an existing refinery to process
heavier crude oil or building an entirely new heavy oil refinery.

“Public interest remains for heavy oil refining and processing capacity
in Western Canada,” said Kevin Birn, an IHS Markit executive director
who heads the Oil Sands Dialogue. “Though the economic outlook has
improved, upgrading continues to look challenged. New refineries could
work under the right circumstances, but are not without risk.”

The prospects for upgrading facilities remain the most challenged, the
study says. The other two options—refinery conversions and new
refineries—have benefited from recent and anticipated changes in the oil
market, which could improve the return in heavy oil processing. Of those
two options, refinery conversions remain the most attractive—by far—due
to lower capital cost. Yet the abundance of so much light, tight oil
will also weigh on any new significant investment in heavy oil
processing in North America, the study says.

“In order to convert a refinery you need a suitable facility available
to be converted, as well as a cost advantage source of heavy crude
supply,” Birn said. “The economics for refinery conversions are the most
favorable of the three options reviewed in our study. But the abundance
of light, tight oil diminishes the incentive for facilities to make that
switch.”

Adding to the challenge, refined product demand in North America is
expected to gradually decline. Any new investments in refining capacity
in western Canada would likely have to displace incumbents or, more
likely, be exported offshore. Finding a party willing to commit to a
mutually agreeable, long-term contract—likely a necessity for obtaining
financing for a new export-oriented refining project—may be a stumbling
block, the study says.

“The most attractive option for growing oil sands production continues
to look like the export of heavy sour bitumen blends to U.S. Gulf Coast
region which imported over 1.8 million b/d of crude oil of similar
quality to the oil sands from offshore places like Venezuela, Mexico and
others in 2016,” said Patrick Smith, the study’s co-author and research
associate at IHS Markit. “But present conditions have oil sands
producers searching for new options as well. A key area of interest is
what is being call partial upgrading which seeks to improve the mobility
of bitumen—reducing the need for diluent used in the creation of bitumen
blends—a significant cost for the industry today.”

A New Look: Extracting Value from the Canadian Oil Sands and all
other Oil Sands Dialogue research by IHS Markit is available at www.ihs.com/oilsandsdialogue.

About IHS Markit (www.ihsmarkit.com)

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