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An Economic Assessment of the Opportunities & Risks of Government-Supported Heavy Oil Refining in Alberta

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An Economic Assessment of the Opportunities & Risks of Government-Supported Heavy Oil Refining in Alberta University of Calgary PRISM: University of Calgary's Digital Repository Graduate Studies Master of Public Policy Capstone Projects 2019-09 Sweet Dreams: An Economic Assessment of the Opportunities & Risks of Government-Supported Heavy Oil Refining in Alberta Hardie, Shamus Hardie, S. (2019). Sweet Dreams: An Economic Assessment of the Opportunities & Risks of Government-Supported Heavy Oil Refining in Alberta (Unpublished master's project). University of Calgary, Calgary, AB. http://hdl.handle.net/1880/111838 report Downloaded from PRISM: https://prism.ucalgary.ca MASTER OF PUBLIC POLICY CAPSTONE PROJECT Sweet Dreams: An Economic Assessment of the Opportunities & Risks of Government-Supported Heavy Oil Refining in Alberta Submitted by: Shamus Hardie Approved by Supervisor: Jeffrey Church, September 2019 Submitted in fulfillment of the requirements of PPOL 623 and completion of the requirements for the Master of Public Policy degree 1 Capstone Approval Page The undersigned, being the Capstone Project Supervisor, declares that Student Name: Shamus Hardie has successfully completed the Capstone Project within the Capstone Course PPOL 623 A&B Signature 2 Acknowledgements A dear family friend who passed left a memorable quote that provided inspiration over this past year: “the best gift anyone could give a person is the gift of time.” I am sincerely grateful to all of those who shared their time with me throughout this endeavor. I offer my sincerest gratitude for the guidance and discipline from Dr. Jeffrey Church for this project, whose earlier courses instilled my passion in economics and continuously challenged me to think several steps ahead. I am also appreciative for the professors at the School of Public Policy who were willing to discuss my research interests and provided opportunities to explore beyond the program; in particular, thank you to Professors Fellows, Flanagan, Rioux, Tombe, and Winter. Special thanks are also due to certain colleagues at the Alberta Energy Regulator and professional acquaintances within the industry willing to share ideas over coffee. The importance of friends and family over this past year cannot be emphasized enough. Thank you, especially, to Ollie, Dale, and Liz who listened to my stories, helped me decompress, and reminded me which day of the week it was with Sunday dinners. Most importantly, I am forever indebted to my wife, Jennifer, who had an infinite patience for my countless late nights, endless stubbornness, and time spent away from home. Upon submission of this report, I look forward to returning to a more relaxed lifestyle, getting caught up on the outdoors and raising Amelia (and Kona). 3 Table of Contents Executive Summary ....................................................................................................................................... 9 Key Findings ............................................................................................................................................ 10 Recommendations .................................................................................................................................. 12 1.0 Introduction .......................................................................................................................................... 13 1.1 Background ....................................................................................................................................... 14 1.2 Purpose ............................................................................................................................................. 18 1.3 Methodology ..................................................................................................................................... 19 1.4 Results ............................................................................................................................................... 22 1.4.1 Price Decomposition .................................................................................................................. 22 1.4.2 Policy Considerations ................................................................................................................. 23 1.4.3 Project Economics ...................................................................................................................... 25 2.0 Price Decomposition ............................................................................................................................. 30 2.1 Feedstock .......................................................................................................................................... 33 2.2 Transportation .................................................................................................................................. 34 2.3 Refining ............................................................................................................................................. 34 2.4 Marketing .......................................................................................................................................... 37 2.5 Taxes ................................................................................................................................................. 38 2.5.1 Federal ....................................................................................................................................... 40 2.5.2 Provincial .................................................................................................................................... 41 2.5.3 Carbon ........................................................................................................................................ 42 2.6 Other Factors .................................................................................................................................... 42 3.0 Policy Considerations ............................................................................................................................ 44 3.1 Temptation – Costs of Intervention .................................................................................................. 45 3.1.1 Regulatory Failures .................................................................................................................... 45 3.1.2 Market Failures .......................................................................................................................... 47 3.1.3 Price Regulation ......................................................................................................................... 52 4 3.2 Translation – Communicating Value & Compliance ......................................................................... 54 3.2.1 Assessing Economic Viability...................................................................................................... 54 3.2.2 Federal Requirements ................................................................................................................ 56 3.2.3 Provincial Requirements ............................................................................................................ 58 3.3 Transformation – Anatomy of a Barrel ............................................................................................. 62 3.3.1 Upstream Production ................................................................................................................. 64 3.3.2 Upgrading in Between ............................................................................................................... 65 3.3.3 Downstream Marketing ............................................................................................................. 74 3.4 Transportation – From Here to There ............................................................................................... 81 3.4.1 Balancing Supply & Demand ...................................................................................................... 81 3.4.2 Pipelines ..................................................................................................................................... 84 3.4.3 Alternative Modes ..................................................................................................................... 88 3.5 Termination – End Use & End Date .................................................................................................. 91 3.5.1 Energy Transition ....................................................................................................................... 91 3.5.2 Industrial Emitters ...................................................................................................................... 93 3.5.3 Blending Requirements .............................................................................................................. 95 4.0 Project Economics ................................................................................................................................. 99 4.1 Cost-Benefit Analysis ...................................................................................................................... 101 4.1.1 Costs ......................................................................................................................................... 102 4.1.2 Benefits .................................................................................................................................... 105 4.1.3 Scenarios .................................................................................................................................
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