Sunday, February 24, 2013

Train Keeps A Rolling

Natural gas and oil pipeline in Northern B.C.
Canadians in general and British Columbians in particular could be forgiven if they are getting a little confused lately about the debate surrounding oil and natural gas pipelines.  To the naked eye they both look the same but, as far as the environmentalists and First Nations are concerned, oil pipelines are bad and natural gas pipelines are good.  Strange considering both are carrying fossil fuels (fossils being something from the dinosaur age remember) and burning either of them threaten to make the earth as warm as it once was when the dinosaurs roamed the lush tropical swamps of northern B.C. and Alberta.  It's this same warm swampland that eventually cooled and turned into the fossil fuels we are so busy extracting in a race to produce "ethical oil" for the U.S. market and/or the folks in Asia who all want to drive cars and live the good life we've been so happily enjoying ever since the invention of electricity and the internal combustion engine.

Tar sand
Crude oil has always been a bit dirty to work with but working with the tar sands has to be the dirtiest work of all. Normally oil is extracted in liquid form from wells drilled into an underground petroleum reservoir, but the petroleum found in Alberta is mostly bitumen, a heavy, tar-like substance that is impossible to pump, particularly where it has mixed with sand and clay to form a thick and sticky substance referred to as "tar sands". In order to recover the oil the tar sands need to be excavated and then trucked to an extraction plant where the bitumen can be separated from the clay and sand using large amounts of heated water. This method takes two tons of tar sand and several barrels of water to make one barrel of oil. The other, less visible method is called "in-situ extraction" which uses steam injection to force the bitumen to flow through a well.  But in-situ methods require large amounts of natural gas; 1,000 cubic feet for every barrel of oil that is recovered.

Alberta Tar Sands
As seen from the air, tar sands extraction results in a very disturbing picture of massive land and habitat destruction, with widespread air and water contamination that can't be easily covered up or rehabilitated. But this is only the first step of the process, the next one is upgrading the bitumen into what is referred to as "synthetic crude" to make it suitable for refining. Once again using large amounts of natural gas (400 cubic feet per barrel) the bitumen is heated and treated to remove unwanted elements and convert it to something that shares the same characteristics of conventional light oil. Only once this process has been completed can it be shipped by pipeline to a refinery where gasoline and other products can be extracted.

Suncor Upgrader in Fort McMurray, Alberta's largest
The upgraders in Alberta's tar sands can produce 1 million barrels a day of synthetic crude but all of the refineries in Alberta together can only handle less than half of that so where is the rest to go?  The obvious first choice is the refining hub along the Gulf of Mexico coastline but you need an approved pipeline to get there which doesn't seem likely these days with President Obama's environmental agenda. A combination of Ontario, Quebec and New Brunswick could also take up the slack if they could reverse the existing east-west pipeline going across the country but that's going to take time. You could also export it to another country via B.C. if there was a pipeline to either Vancouver, Prince Rupert, or Kitimat, all of which are proving to be non-starters in the land of born again tree-huggers.


Oil Refining Process

On top of this Alberta would like to triple its synthetic crude production, and this is where things get nasty.  Because of this bottleneck in the supply chain, the price of Canadian crude oil has dropped 20% or more below that of the world market price which means we are losing billions. A list of all the oil refineries in the world quickly identifies the countries that are serious about refining oil and the ones who aren't. Canada's largest, the Irving oil refinery in New Brunswick handles 300,000 barrels a day and is somewhere in the middle of the pack.  Even though there is good money to be made in refining products we have historically shipped out the crude oil and let someone else do the dirty work. Now this short term thinking is catching up with us.

Irving Oil Refinery in New Brunswick, Canada's largest
There is, however, a proposal to build a refinery in Kitimat to handle 500,000 barrels a day of synthetic crude which, its backers say, will employ 6,000 people just to assemble it over a 6 year period and then 3,000 people to operate it once it's built. Of course this would be conditional on getting a pipeline built to bring in the crude oil and another one for the natural gas that would be needed to power the facility. This is only one of the many plans for the Kitimat/Prince Rupert corner of B.C, where there are now more than 5 different proposals to build LNG (liquid natural gas) plants.

Natural Gas Well
In the old days natural gas didn't have much value and, unless there was a nearby market, it was usually burned off at the wells in a process known as flaring.  While this situation has improved somewhat, the price still remains very low in North America with natural gas getting less than half of the European rate and 1/3 of the Asian rate. This cheap rate makes it very attractive for powering industrial enterprises like tar sands and oil refineries but also makes it attractive for traders eager to cash in on the lucrative export market.

Herein lies the dilemma. After the U.S. and Russia, Canada is ranked 3rd in the world for natural gas production but, without a way to export natural gas to markets willing to pay a decent price, it becomes even more of an important component in the tar sands project where natural gas can make up nearly 50% of the operating costs. However, if there was an LNG plant near a port where the gas could be loaded onto ships for export, this would bring the gas producers a much higher price for their product and potentially ruin the business case for using natural gas in the tar sands projects. Of course if the tar sands oil could find a way out of its landlocked situation then it would also fetch a higher price and none of this would matter.

While it works well to transport natural gas across land in pipelines, this is not practical for ocean transport and the gas needs to be condensed somehow and loaded into specially designed ships as a liquid gas which is 1/600 of the volume of the gas in its natural state. This liquefaction process at an LNG plant involves the removal of dust, water, and other contaminants such as carbon dioxide and mercury, before the gas can be condensed under pressure to a temperature of -162 degrees Centigrade or -260 Fahrenheit.  The liquid is then loaded onto the ship and, once it arrives at its destination, the process is reversed and the gas can then be delivered for its final purpose.

LNG Tanker
Oil Tanker
Fans of natural gas like to point out that burning it produces 30% less carbon dioxide than burning  petroleum and 50% less than burning coal for the same amount of energy. However, because natural gas is 90% methane, it's 20 times more damaging as a greenhouse gas than carbon dioxide if it escapes into the atmosphere.  As ugly as an oil spill may be, the damage to the environment can be just as severe if there is a natural gas leak. With all the "fracking" and drilling going on in the natural gas industry lately you can be sure there are all sort of leaks happening happening in the field that are quietly being ignored.

The port of Kitimat is a natural, deep water, ice-free harbour able to handle ships of any size and already handles a variety of bulk cargoes.  The reason oil and gas companies prefer Kitimat over nearby Prince Rupert is that it's easier to build a pipeline through the flat Kitimat valley than alongside the mountainous Skeena River to Prince Rupert. But for some reason the opponents of oil tankers having to traverse the tricky Douglas Channel out of Kitimat don't seem concerned about LNG tankers having to do the same thing. Both are carrying petroleum products. Both are similar in size and both are constructed with double hulls to protect against leaks in the event of the outer hull being damaged.

Oil spills and natural gas leaks are one thing but the real issue is the ugliness of the tar sands project itself which has a much larger environmental impact than any conventional oil extraction project. By doing everything in their power to thwart any pipeline construction, the environmentalists are hoping to somehow shut it down in spite of the thousands of jobs it provides, the thousands of products it ultimately produces, and the billions in revenue it generates.  This of course is a pipe dream because with this much economic activity at stake, the oil will eventually find a way to get to market.  The only question that remains is whether or not we get to process any of it along the way.

Train of oil tanker cars

In the meantime, while First Nations people and environmentalists worry about a pipeline, the rail road companies have been busy delivering crude oil to various ports and refineries and doing an end run on the whole process.  A year ago only 5,000 barrels a day travelled by rail in Canada but already that's up to 80,000 with 200,000 barrels a day predicted by next year. Shipping oil by rail is far more hazardous than doing it by pipeline but there are no regulations preventing it and the practise is rapidly spreading all over North America where U.S. railways now have the capacity to transport millions of barrels a day.  While it's more expensive to ship oil by rail (roughly $2.00/barrel) the price differential caused by the bottleneck easily makes up the difference. So, while the pipeline debates continue to attract all the media attention, the trains just keep quietly rolling along in the background.

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