Bitumen Price Volatility, Supply Chain Complexity and Vertical Integration
a report by
Emil D Attanasi
US Geological Survey
Bitumen is a viscous oil with a viscosity >10,000cp under reservoir conditions and an American Petroleum Institute (API) gravity of <10° (viscosity increases as a material’s resistance to flow increases, and API gravity measures the inverse of fluid density). Compared with conventional crude oil, bitumen is characterised by high viscosity, high density (low API gravity) and high concentrations of sulphur, acids and heavy metals. Bitumen includes extra-heavy oil and oil (tar) sands. Large deposits of extra-heavy oil are located in Venezuela’s Orinoco Oil Belt. However, this analysis focuses on the industry developing the massive oilsands deposits in the Athabasca, Cold Lake and Peace River areas of Northern Alberta, Canada. Bitumen in these deposits does not generally flow, so heat or solvents must be injected into the reservoir to lower its viscosity to induce flow to a well where it can be extracted. The inclusion of the recoverable bitumen as oil reserves has catapulted Canada to second place, just below Saudi Arabia, in the world’s identified recoverable oil. This analysis1
shows that bitumen prices are
more volatile than conventional crude oil prices. It then argues that bitumen price volatility and the complexity of the bitumen supply chain drive producers towards vertical integration.
Supply Chain from Extraction of Bitumen to High-value Transportation Fuels
Extraction Processes, Costs and Transportation
Bitumen at depths of 250 feet is extracted by mining oilsands and then separating it from the host sand using a hot water process. Mining recovers about 82% of the bitumen in place. Bitumen that is too deep for mining may be recovered from vertical or horizontal production wells (in situ recovery) for sustained periods if heat is added to the reservoir, usually in the form of steam through injector wells. Thermal bitumen recovery uses natural gas for steam generation at a rate of about 1,000 cubic feet per barrel of recovered bitumen. Although mining operations consume less gas per barrel of bitumen, other operating costs more than offset the lower natural gas consumption. Depending on the nature of the reservoir and technology applied, thermal methods can recover 25–50% of the bitumen in place.2
Operating costs of large-scale extraction operations are about CA$14 per barrel and development costs (capital expenditure, capex), based on a 9% cost of capital, are between CA$5 and CA$6 per barrel without accounting for royalties and income taxes.3
Bitumen deposits
commonly contain hundreds of millions of barrels of recoverable oil. Per-barrel extraction costs of conventional oil deposits with similar reserves are typically one-quarter to one-third of these costs.
Pipelines must carry 50–100% more fluid for a desired bitumen flow rate than pipelines for conventional oil because of additional light oil or natural gas liquid diluents required for the bitumen to flow. The light oil/bitumen blend is a ratio of 50:50; alternatively, the natural gas
© TOUCH BRIEFINGS 2010
liquid/bitumen blend is 33:67. Operating costs also increase because of the high cost of diluents. If diluents are recycled rather than sold with the bitumen, a return pipeline is required.
Upgrading Bitumen for the Crude Oil Market
Most refineries are designed to process light crude oils with API gravities >30°. Light crude oil yields about 78% of its refined fluid volume as high-value transportation fuels: gasoline, jet fuels and diesel fuels. By contrast, when bitumen is run through the simple refinery processes, the yields of high-value products are around 38%, with the rest of the product taking the form of low-value residual oil and asphalt. Because of the lower yield of high-value products, refineries steeply discount the price they are willing to pay for all heavy oils (<20° API), including bitumen. Refineries designed to accept heavy oils (10–20° API gravity) have extra process units (capital) that upgrade the large quantity of residual oils following initial distillation, adding substantially to refining cost. Bitumen upgrading processes are even more intensive.
Raw bitumen can be chemically upgraded to refinery feedstock, synthetic crude oil (SCO), by stand-alone upgrading plants. About 60% of the bitumen produced in Alberta in 2006 was upgraded in Canada and most of it was upgraded in captive bitumen upgrader facilities near operating mining projects. A small but declining part of the produced bitumen is blended with light oil and transported directly to refineries in Canada that accept heavy oil. The rest of the raw bitumen is exported to the US, which has by far the largest share of the world’s refinery capacity capable of turning heavier oils into transportation fuels and lubricants.
Bitumen upgrading costs increase with the desired quality of the SCO product, as measured by the gravity and sulphur content. Higher-gravity, lower-sulphur SCO fetches higher prices at standard refinery complexes. Recent studies estimate an upgrade plant’s required capital at CA$37,500 per daily barrel of SCO capacity. At a 30-year life and 9% cost of capital, the unit capital cost, based on the carbon rejection process, is just under CA$10 per barrel. Fixed annual unit costs are about CA$5 per barrel of SCO in addition to consumables of 0.5mcf gas per barrel of SCO, so partial upgrading costs are at least CA$18 per barrel.3
These rough
calculations imply that to support a new plant the price differential between raw bitumen and the SCO product would have to be no less than CA$18 per barrel, to which must also be added the upgrade plant’s operating margin, fixed fees and all local and income taxes.
Like most chemical processing plants, upgrading plants must be designed to take full advantage of scale economies based on available resources and the natural market size. That plant must also be operated at high utilisation rates to be profitable. Modern upgrading plants are nominally sized at a minimum of 100,000 barrels per day of bitumen/diluent mixture. Larger in situ bitumen recovery projects commonly have smaller
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Industry Outlook
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