Evaluating New Opportunities in North American Downstream

Gordon Cope, Contributing Editor, discusses how investors in North American refineries and petrochemicals are tacking in the face of adversarial winds, and evaluating new opportunities.

The international energy sector is entering a new world order. Nations are scrambling to find alternatives to Russian supplies of oil and gas, jurisdictions are reducing their carbon footprints, new fuels such as hydrogen are entering the market at warp speed, and the overriding priority of energy security is super-charging geopolitics.

North America is blessed with abundant fossil fuels and a comprehensive downstream sector, but, like everyone else, must pivot to the new realities or be left in the dust by more nimble competitors.

The U.S.A.

Refiners in the US are seeking to rebalance production in response to COVID-19 regulations and international fuel demand. According to the US Energy Information Administration (EIA), six US crude oil refineries have closed since the COVID-19 pandemic began, dropping US capacity from 18.98 million bpd to slightly under 18 million bpd. Now, refiners are reversing the trend.

In early January 2023, ExxonMobil completed a US$2 billion expansion at its 369 000 bpd refinery in Beaumont, Texas, US. The project, almost a decade in the making, will see the startup of a 250 000 bpd crude distillation unit (CDU), making it the second largest refinery in the US. The new capacity comes at a time when diesel and gasoline reserves are at five-year lows; refiners are receiving a very healthy US$35/bbl crack spread (the difference between the price of crude and refined fuels). “Right now, margins are sensational,” said Garfield Miller, President of refining investment bank, Aegis Energy Advisers Corp. “These margins tell you that as far as the US Gulf Coast is concerned, there is plenty of demand relative to supply.”(1)

Kevin O’Leary, a panelist on the popular TV show, Shark Tank, has announced plans to build a US$14 billion refinery in the US. “At the end of the day, we can make our own energy here very clean,” he noted, in a television interview. “We haven’t built a refinery in America for decades because we can’t permit it. I’m going to find a state that wants to work with me. I’m going to get a permit and we’re going to do the right thing for America. We have to have more refineries.”(2) The financier later commented that North Dakota would be a primary candidate due to its pro-fossil fuel stance.

A Note on LNG in the U.S.A:

Currently, US LNG plants are exporting approximately 13.4 billion ft3/d of gas; that number is expected to climb significantly over the next five years as new trains come online at the Golden Pass, Plaquemines and Corpus Christi sites, pushing exports above 20 billion ft3/d by 2028. When Sempra’s Port Arthur project and LNG projects in Mexico (using gas from the US) come on-stream, that figure could rise to 30 billion ft3/d within the decade.

In March 2023, Dubai-based energy company Qilak announced a plan to build a US$5 billion LNG plant in Alaska’s North Slope. The region has over 35 trillion ft3 of stranded gas, and is several thousand kilometres closer to key Asian markets than the massive Yamal Peninsula LNG complex in Russia. The initial phase would see up to four vessels per month delivering 4 million tpy to South Korea, Japan and Taiwan.

In April 2023, the US Department of Energy (DOE) approved exports from the proposed US$40 billion Alaska LNG project. The Alaska Gasline Development Corp. plans to start delivering up to 3.5 billion ft3/d of gas via an 800 mile pipeline running from the North Slope to an LNG plant on the Pacific coast. The latter announcement, coming on the heels of the Biden administration’s approval for the Willow conventional oilfield project in the Alaska Strategic Petroleum Reserve, left environmentalists aghast. Alaska state officials applauded the move.

In late 2022, Chevron Phillips Chemical and QatarEnergy announced they had reached FID on a new petrochemical complex in Orange, Texas. The Golden Triangle Polymers Co. will build a complex that includes a 2 million tpy ethane cracker, and two 1 million tpy high-density polyethylene units. The facility is expected to be completed by 2026.

Canada

Since the election of the Trudeau government in 2015, Canada’s oil and gas sector has been inundated by federal regulations geared to transitioning the country to a non-carbon economy. This has resulted in cancelled pipelines, regulatory delays and missed opportunities. When German Chancellor, Olaf Scholz, visited Canada in late 2022 seeking LNG exports to alleviate the loss of Russian imports, Justin Trudeau replied that there was “no business case” for building East Coast gasification facilities (Germany subsequently signed a 15-year contract with Qatar). Despite this, oil and gas remains the country’s number one export, accounting for CAN$104 billion in 2022, primarily in the form of crude shipments to the US.

Canada’s total refining capacity is approximately 2 million bpd. New clean fuel regulations established by the Canadian federal government require refiners to reach net-zero emissions by 2050. The Canadian Association of Petroleum Producers (CAPP) estimates that it will cost up to CAN$75 billion to reach that goal and significant capital is already being deployed to reconfiguring existing facilities:

• In January 2023, Imperial Oil announced that it was investing CAN$720 million to create the largest renewable diesel facility in Canada. Initial production has already begun at Imperial’s Strathcona refinery near Edmonton, Alberta. When the module is commissioned in 2025, it will be able to produce 20 000 bpd from a feedstock of locally-sourced canola and soy, as well as blue hydrogen.
• Tidewater Renewables invested CAN$430 million to build Canada’s first stand-alone renewable diesel refinery. The plant, located in Prince George, British Columbia (B.C.), is expected to enter production in mid-2023. When it reaches full operational capacity, it will produce 170 million l/yr of fuel using canola oil, tallow and used cooking oil. Unlike biodiesel, which can be mixed with conventional diesel up to 10%, renewable diesel can be substituted 100%, reducing emissions by up to 90%.
• Since its purchase in late 2021, Newfoundland & Labrador’s Come By Chance refinery has been undergoing conversion to a biofuels refinery. Cresta Fund Management has revamped the facility’s hydrocracker and diesel hydro-treater to produce renewable diesel and sustainable aviation fuel (SAF). The bio-refinery will have the capacity to produce up to 18 000 bpd of renewable diesel and SAF, with production currently expected to begin during 2023. Cresta has also indicated that the capacity could later be expanded to 35 000 bpd, with the addition of a further stream of green ammonia fuel. Products are destined for both domestic and international markets.

A Note on LNG in Canada:

For over a decade, various developers have been proposing LNG projects in B.C.; the province is finally seeing development. LNG Canada, led by Shell, is completing its plant in Kitimat, B.C. The first phase of 14 million tpy is scheduled for completion in 2025. Construction of a 2.1 million tpy Woodfibre LNG plant near Squamish, B.C., is set to begin in late 2023, with a completion date in 2027. In March 2023, the B.C. government approved the construction of the Cedar LNG project, also near Kitimat. The CAN$2.4 billion floating LNG facility, which is majority owned by the Haisla First Nations, is expected to produce up to 4 million tpy.