Falling Behind

Boy, I've been trying to keep up with blog-worthy subjects, but I've recently lagged behind. Something that came up a few days ago:

CALGARY - The Alberta government and 16 industry sponsors are looking at building a giant, $7-billion refinery complex near Edmonton, the first in North America in a quarter century.

The group, led by Alberta Economic Development, is getting down to the finer details of an ambitious strategy that started two years ago and could lead to a 300,000 barrels-a-day refinery and petrochemical complex that could be in operation as early as 2012.

The refinery would be the largest in Canada. It would be expandable to 450,000 barrels per day, putting it on par with the giant refineries of the U.S. Gulf Coast.

The idea that the Alberta government needs to subsidize this development is absurd. With fuel prices where they are, the private market can easily fund this entire development on it's own. Let's see. 300,000 barrels a day comes to roughly 110 million barrels a year. Of course, the whole point of a refinery is to add value to the oil, and refiner margins seem to range from $5-$10 per barrel. Assuming the low end of this scale, this refinery would pay off it's initial investment in 14 years. If we pick the median of the margin ($7) it's ten years, and the extreme of the scale gives us less than $7 years. The point is, the private market can easily find the money for this investment, and even 14 years is a relatively short-term investment when you're talking infrastructure.

If the refinery can be expanded to 450,000 bpd with a greater economy of scale, those numbers would all shrink somewhat.

The private market will make this refinery without public subsidies. If I lived in Alberta, I'd call my MLA and complain about this waste of taxpayer's money. Of course, if I lived in Alberta I'd have already seen much worse abuses of public funds, so maybe I'd be resigned to my fate.

But staying in Alberta, we can see that this is part of a trend - the oil industry seems to be accepting that conventional crude is running dry, and no price is too high for Alberta's synthetic crude:

PARIS -- French oil giant Total SA, amid rising oil and natural-gas prices, is considering building a nuclear power plant to extract ultraheavy oil from the vast oil-sand fields of western Canada.

This comes as oil prices -- driven even higher by Hurricane Katrina and now the threat of Hurricane Rita -- are removing lingering doubts about the long-term profitability of extracting the molasseslike form of oil from sand, despite the fact that the output is much more expensive to produce and to upgrade than is conventional crude.

At the same time, prices of natural gas -- which oil-sands producers have relied on to produce the steam and electricity needed to push the viscous oil out of the ground -- have risen 45% in the past year. That is prompting Total, which holds permits on large fields in Alberta that contain oil sands, to consider building its own nuclear plant and using the energy produced to get the job done.

This has been coming for a while now. I was reading discussions at least a year ago about building nuclear reactors to make tar sands in to useable oil. Of course, Total still has to actually sell the government of Alberta on nuclear power, which won't be easy.

Even now, despite wanting to cut production costs, few oil-sands producers have been willing to talk openly about the nuclear possibility for fear of protests from environmentalists. Nuclear power doesn't bring back good memories in Alberta, where in the 1950s U.S. and Canadian scientists looked into the possibility -- later abandoned -- of detonating an atomic bomb to bring oil to the surface.

The article is behind the Wall Street Journal's pay wall, sadly. But these two examples show something important: even if the optimists are right, and peak oil is decades away, the reality is that cheap oil is gone forever. If it weren't, Total would never breathe a word about using nuclear power - its stock price would leave a smoking crater in the stock exchange floor.

This is the new reality we've entered - nuclear oil. It's like an environmentalists worst nightmare. Bizarre. But the market is serious. Look at this picture from the article:



Note that conventional crude is projected to continue it's decades-long decline. All off Canada's increased oil production is expected to come from tar sands production. There's probably no way this will lead to cheaper oil - indeed, if it did, the tar sands operations would collapse.

But if Canada's production actually does begin to push close to 4 million bpd of production, that will be astounding. That would make us one of the (I think) top three producers of oil in the world. It would put us in about the same rank as Iran, possibly behind only the United States and Saudi Arabia.

Of course, it would be in the interests of the Canadian economy to use as little of that oil domestically as possible. Every barrel of oil we send overseas brings us a sweet $60 US, or it's equivalent in Euros, Yen, or Yuan.