Publications

Survey of Energy Resources 2007

Natural Bitument - Economics of Upgrading and Markets for Upgraded Oil

Fig. 4-7  shows selected published estimates of capital costs (Vartivarian and Andrawis, 2006) that were expressed on a per daily barrel of (upgraded) synthetic oil (syncrude) plant output capacity. The purpose of the Vartivarian and Andrawis study was to compare costs of a number of alternative plant process configurations having a nominal input capacity of 100 000 b/d of bitumen/diluent feedstock, consisting of 80% bitumen and 20% diluent. The bitumen had an assumed gravity of 8.6° API and a sulphur content of 4.8%. Fig. 4-7 shows plant process investment cost and investment per barrel of output capacity, along with the syncrude product specifications. The investment costs were based on US Gulf Coast costs in 2005 US dollars. The greater the intensity of the processing, as indicated by the quality of the synthetic oil product (higher API gravity and lower sulphur content), the higher the investment cost per daily barrel. The plant investment costs are from 29-36% greater when the high temperature/pressure residue hydrocracking process (configurations with RHCR - Fig. 4-7) is used than if the residue is coked (configurations with RDCK - Fig. 4-7). The configurations with this higher cost process (RHCR), however, result in 30% greater synthetic oil output than under coking. The economic benefits of the higher-cost process depend on syncrude prices.

The two features to notice about Fig. 4-7 are firstly, the wide range in initial investment costs per daily barrel of synthetic crude oil output and secondly, the absolute level of investment required; never less than 800 million dollars and could easily exceed 2 billion dollars. The investment per daily barrel of bitumen production capacity (mine and extraction or in-situ recovery) is of the same order of magnitude as the required investment per daily barrel for the upgrader facility. If the per daily barrel of production cost was CDN$ 20 000 or US$
17 000, the combined cost of the production/upgrading facility for a high-quality syncrude could be US$ 37 000 per daily barrel, or almost US$ 3 billion for an integrated project to supply the upgrader at 80 000 barrels of bitumen per day. Such capital requirements would be well beyond the reach of small operators.

Plants that upgrade extra-heavy oil and bitumen demonstrate the generic characteristics of chemical process industries. They are subject to significant economies of scale, that is, unit capacity investment cost increases rapidly as capacity is reduced below optimal size, and optimal-size plants must operate at high utilisation rates to be profitable. The most profitable upgrade plant design depends on the value placed on its synthetic crude product by refinery purchasers, as well as on the cost of inputs to the upgrade plant. This market value is determined by the availability of competing crude oils of the same or superior quality and the technical capability of local or captive refineries to accept the crude and in turn, to produce high-value products.

Past conduct may indicate the pattern of future development. Partners of the Petrozuata and Cerro Negro projects in the Orinoco Oil Belt had captive US and Caribbean refineries which influenced the design of the San Jose upgrading facilities. The initial Canadian mining operations built on-site upgrading facilities that produced a syncrude that was matched with available refinery capacity.

Downstream vertical integration is the economic term used when a raw materials producer performs the next stages of processing, such as refining or smelting and even selling finished products. Alternatively, if a steel maker starts a mining subsidiary to supply the ore to the steel plant, it is upstream vertical integration. A primary motivation for economic integration downstream is to manage the risks inherent in raw materials markets by providing a means through a captive upgrading facility and perhaps refinery to market the bitumen product. The refiner's price differential between heavy oil and light oil can be notoriously unstable, so there is a real risk to the bitumen producer of its being unable to recover costs, particularly in the light of the relatively high raw bitumen production supply costs presented in Fig. 4-5. In general, in a rising price regime heavy oil price increases will be smaller on a dollar basis than light oil prices, leading to an increasing price differential. The price differential between light and heavy oil also increases as inventories build at refineries. A prolonged period of oversupply of conventional oil and the subsequent bitumen price decline could drive prices to levels below operating cost. It is not surprising that most of the announced new projects specify either a captive upgrading facility or a strategic alliance (de-facto vertical integration) between producers, merchant upgrading plants, and refiners as a response to market risks.