In the last month a new narrative has arisen in the anti-Trans Mountain pipeline community: that the market for bitumen is non-existent because it is “far inferior to the higher-quality oil” sold in the United States and that due to the new Louisiana Offshore Oil Port (LOOP) there will be no market for Alberta’s bitumen. Needless to say this narrative is both uninformed and completely wrong. But given the number of places I’ve read this codswallop, it is clear that someone has to debunk the claims. I will spend the rest of this post demonstrating how and why this narrative is completely misguided and unfounded.
Let’s start with some stuff we should all know. Crude oils are described based on their API gravity. API gravity is the standard specific gravity used by the oil industry. To borrow from a useful web site:
Specific gravity for API calculations is always determined at 60 degrees Fahrenheit. API gravity is found as follows:
API gravity = (141.5/Specific Gravity) – 131.5
Though API values do not have units, they are often referred to as degrees. So the API gravity of West Texas Intermediate is said to be 39.6 degrees. API gravity moves inversely to density, which means the denser an oil is, the lower its API gravity will be. An API of 10 is equivalent to water, which means any oil with an API above 10 will float on water while any with an API below 10 will sink.
The API gravity is used to classify oils as light, medium, heavy, or extra heavy. As the “weight” of an oil is the largest determinant of its market value, API gravity is exceptionally important. The API values for each “weight” are as follows:
- Light – API > 31.1
- Medium – API between 22.3 and 31.1
- Heavy – API < 22.3
- Extra Heavy – API < 10.0
Bitumen is a heavy oil. It is characterised by high viscosity, high density (low API gravity), and high concentrations of nitrogen, oxygen, sulphur, and heavy metals. This differentiates it from virtually all the new oil finds in the US which are lighter oils (like the Bakken crude which has an API gravity of 42). As analogies go bitumen is often described as a lot like peanut butter while Bakken oil is like a salad oil.
Note the comparisons that are used to describe these types of crude oil. They imply that one type of crude oil (lighter blends) are more appealing than the heavier crude oils. This is a common theme in the activist literature. Light crude oils are “good” or “higher-quality” and the heavy crude oils are “inferior“. The problem with that narrative is that it is demonstrably wrong.
Heavy crudes and light crudes are simply different products and have different characteristics and different demand curves. To explain let me make a simple analogy, consider the two major types of transportation fuels: gasoline and diesels. Both gasoline and diesel are refined petroleum hydrocarbon fuels but they aren’t interchangeable. You can’t fill a diesel train with low-octane gasoline and expect that diesel engine to run. Nor can you fill a race car with diesel and expect it to operate. You use gasoline when you want horsepower and you use diesel when you want torque. No one would say diesel fuel is inferior to gasoline. It is simply a different fuel.
The same is true in the differences between heavy and light crude oils. Like gasoline and diesel engines, there are light crude and heavy crude oil refineries. Light crude oil refineries tend to be simpler in design and cheaper to build than heavy oil refineries. This primer on the topic can really help fill in your gaps but the critical thing to understand is that any refinery is incredibly expensive to build and when built a refinery is optimized for a certain type of input and does not operate well using the wrong input.
Heavy crude oil refineries will include very expensive cracking and coking units, designed to break down the long chain hydrocarbons into the smaller hydrocarbons used in gasoline, kerosene and diesel. Unfortunately, the simpler light crude refineries don’t typically have these cracking and coking units. Ironically, this can mean that the light crude refineries can’t handle the heavier components in the light crude oils and so the refineries end up producing more undesirable byproducts (like petroleum coke) per barrel of input. What this means is that the heavy oil refineries produce more gasoline/diesel/kerosene per barrel of heavy crude oil than the light refineries do per barrel of light crude oil and the heavy refineries produce a lot less waste petroleum coke per barrel as well. In financial terms, the heavier crudes produce much higher margins per barrel of input than their lighter crude cousins and generate less waste byproduct that have to be disposed.
Reading back that last paragraph something becomes clear. If you have spent the billions to build a heavy oil refinery there is absolutely no way you are going to fill it with light crude. It would be like building a high-precision race car at the big race and filling it with a low-quality ethanol blended gasoline…it just isn’t something anyone would do. This is particularly important because:
over the past 10 years, most refineries in the Gulf Coast and US Midwest have been modified into high-conversion facilities. These refineries crack and coke the heavy crude “bottoms” into high-value products, removing all traces of sulphur to produce expensive low-sulphur fuels. These highly complex facilities are specifically designed to process heavy sour feedstock, such as Western Canadian Select. In fact, refining margins are better with heavy crude feedstock than lighter oil.
Going back to the topic of this blog post we now understand three things:
- A heavy oil refinery will seek heavy, not light crude oils for its inputs.
- The US and China have a lot of very expensive high-conversion heavy oil refineries.
- Virtually all the oil produced in the US is light crude that is not an appropriate input for the high-conversion refineries in the US Midwest and Gulf Coast.
Now let’s look at all these recent articles that popped up in my Twitter feed in the last month:
- The fatal flaw of Alberta’s oil expansion – National Observer
- Why Kinder Morgan’s Pipeline Is DOA – Tyee
- Alberta’s oil exports face ocean of trouble – Climate News Network
- Out of the LOOP: The Fatal Flaw of Alberta’s Oil Export Expansion – The Energy Mix
- Another reason why expansion of Alberta’s oil/tar sands has a weak business case – Toronto sustainability series
All these articles share two common features:
- they all claim that there will be no demand for Alberta bitumen because of recent developments in the US, and
- they all derive their analyses back to a single author: Paul McKay at The Energy Mix.
The number of times this same analysis has been sent to me is simply insane. The man is a one-man, bad-content provider who, through the power of repetition via numerous alternative publications, has almost single-handedly convinced the activist community that there is something wrong with bitumen and that there will be no demand for this “inferior” product in the future. As I have shown in this blog post, the truth is entirely different. The heavy oil refineries in the US Midwest, the Gulf Coast, in California and in China all want heavy crude and do not want light crude. They like the high margins, the lower volume of waste and the range of products that a high-conversion refinery can produce that a light oil refinery can’t produce. This would explain why the US is importing so much Canadian heavy oil while exporting so much of their light crude oil production. It would also explain why sophisticated oil companies are looking for ways to move oil sands to market via rail and pipelines.
So when an activist links to one of these ridiculous screeds recognize it is simply a load of codswallop and that even a cursory investigation into the actual business of refining shows how this narrative is completely misguided and unfounded.