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WHERE OIL AND WATER MIX – The state was built on oil and the Port Arthur refining hub on the gulf coast is happy to have Alberta’s ‘dirty ‘oil

Posted by Gilmour Poincaree on November 2, 2008

Published: Saturday, November 01, 2008

Claudia Cattaneo, Financial Post

PORT ARTHUR, Tex. – By the middle of the next decade, this weathered city in America’s deep south Marine One, carrying President George W. Bush, flies past an oil rig in the Gulf of Mexico near Cameron, La., during an aerial tour Tuesday, Sept. 27, 2005, of recent hurricane damage.abutting the Gulf of Mexico, will receive a flood of oil from Fort McMurray’s oil sands plants. About one million barrels a day of Alberta oil will flow into the world’s biggest refining market.

As far as long-time resident Floyd Batiste is concerned, it’s about time.

“I am not a politician, but I think this country and Canada have a very good relationship,” said Mr. Batiste, who runs the city’s economic development corporation.

TransCanada Corp. of Calgary and its partners have picked Port Arthur, about 150 kilometres east of Houston, to end the $12.2-billion Keystone pipeline that will feed local refineries and others perched along the U. S. Gulf Coast.

The surge of Alberta oil to the area could eventually swell to two million barrels a day, absorbing most of the volume growth expected from the deposits in the next decade.

With three long-established refineries, new liquefied natural gas plants under construction and so many pipeline connections its underground looks like a “spaghetti bowl,” any talk of Canada’s “dirty oil” hasn’t caught on in the disadvantaged community, where many of the 56,000 residents are older and unskilled.

The community, whose boarded-up downtown resembles a Caribbean outpost passed over by the tourism industry, desperately needs good-paying jobs and investment.

Mr. Batiste said oil industry spending could make a lot happen.

“I would say probably less than 30% of workers in these plants actually live in Port Arthur. [Local] people aren’t skilled enough,” he said. “There has been a tremendous effort by just about every political entity, industry to upgrade the skill-set of people. In my opinion, industry has taken the lead.”

After suffering deeply in the mid-1970s from a refinery downturn, then coasting for many years due to lack of investment, Port Arthur’s economy is picking up.

Investments worth US$15-billion are beginning to flow in, some related to refinery expansions to process oil from Canada.

San Antonio, Tex.-based Valero Energy Corp., French major Total SA, Royal Dutch Shell PLC and Saudi Aramco are all expanding their plants. Exxon Mobil Corp. is building a liquefied natural gas terminal.

“There are not many communities that will accept them, but we have always been a refinery town,” said Mr. Batiste. Indeed, some plants are located a mile away from people’s homes.

Like Fort McMurray, Port Arthur is an old oil town. The stuff is in its blood: the city’s slogan is “Port Arthur, where oil and water do mix. Beautifully.”

The Spindletop oil discovery in nearby Beaumont in 1901 ushered in the modern oil era in the United States, giving birth to oil companies like Gulf, Amoco and Humble Oil Co., now a part of Exxon.

Refineries were built to process the gusher. But as fields matured, imports were brought in to keep the refineries full.

Now, Port Arthur’s refineries are among 30 spread out over the Texas/Louisiana coast, in Houston’s Ship Channel, Lake Charles, Texas City and other points nearby. The region is the largest refinery centre in the world.

It keeps the nation on the move, processing seven million barrels a day (out of 17.4 million refined in the United States). When its plants are offline, as was the case last month during Hurricane Ike, many parts of the country grind to a halt.

For Canadian oil producers, the Gulf Coast is the Holy Grail: More refineries to process heavy oil than any other place on Earth.

Already, refiners import about 1.9 million barrels a day, largely from two sources: Venezuela (600,000 barrels a day) and Mexico (nearly one million barrels.)

Refiners started getting worried about future supplies from these sources three to four years ago, said Neil Earnest, a global refining expert and vice-president at Dallas-based Muse Stancil & Co.

Mexican crude production is in steep decline because its main oil field, Cantarell, is maturing. Meanwhile, Venezuela President Hugo Chavez is a wild card. He continues to issue threats to cut off oil supply to the United States while forging alliances with countries like Russia.

Indeed, some supply contracts from Venezuela are coming to an end in 2011, said Russ Girling, president of pipelines at TransCanada, the unit that is building Keystone.

“As they look around the world for alternative sources of heavy supplies, what immediately hits the radar screen is Western Canada,” Mr. Earnest said. “Country risk is about zero … and there are very real prospects that supplies from Western Canada will increase in the near term. That is the attraction.”

Canadian heavy oils are also similar to those produced in Mexico and Venezuela and can fill the gap at little additional cost to existing plants, he said.

Not everyone sees the oil sands as an ideal replacement. Green organizations such as Natural Resources Defense Council are up in arms over Keystone. In September, the group sued top U. S. state government officials, including Secretary of State Condoleezza Rice, in a bid to try to stop it. The Washington-based lobby group argues the pipeline will encourage oil sands development, resulting in big increases to greenhouse gas emissions.

Mr. Earnest said greenhouse gas emissions in Canada are not high on the agenda in the Gulf Coast industry.

Bill Day, a spokesman for Valero, argued its Port Arthur plant already processes oil similar to Canada’s. “We will let the politicians deal with the politics of it. We are in the refining business, and as long as there is demand for fuel, companies like ours will meet that demand,” he said.

Valero, the largest refiner in North America, with throughput capacity of 3.1 million barrels a day, has committed to being a shipper on Keystone, signing large supply contracts with Canadian producers. It has an option to take equity ownership.

Its refinery is able to process 100,000 b/d of Canadian heavy oil currently, Mr. Day said. The company is investing US$2.2-billion to handle even more Canadian supply.

“There was this whole debate about whether it’s better to refine the oil in Canada where it exists, or is it better to bring the oil to where the refineries already are set up to process this kind of oil. We believe it’s most cost-effective to ship it down by pipeline, to where refineries are already in place,” Mr. Day added.

He was referring to the Alberta government’s preference that more upgrading be done in province to capture greater economic benefits from the development of the oil sands. However, that strategy is losing traction as weaker oil prices and high construction costs in the province make upgrading in Alberta uneconomic.

Already, EnCana Corp. has linked up with ConocoPhillips, Husky Energy Inc. with BP PLC. Petro-Canada and Suncor Energy Inc. indicated last week they would look for refineries in the United States rather than upgrade in the province.

LyondellBasell’s Houston refinery, built nearly a century ago and upgraded in 2003 to process heavy oil from Venezuela, is studying whether to source Canadian supplies. Partly owned by Venezuela’s state-owned Citgo Petroleum from 1993 to 2006, the Rotterdam-based company has since re-acquired full ownership. It is now the world’s third-largest chemical company and a producer of biofuels.

Spokesman David Harpole said the refinery still has a supply agreement with Venezuela, but believes “it’s in our interest to maintain flexibility” and find new heavy oil sources.

“If we can overcome the logistical side of things and secure a long-term pipeline agreement to transport the material and a long-term crude supply agreement, we would look at opportunities to significantly increase our use of Canadian crude,” he said.

With the world running out of energy options, the company is open to the oil sands, even if they generate more greenhouse gases than other sources, Mr. Harpole said.

“Look at offshore drilling, the challenges that come to that, the added depths that they are having to go to in the Gulf,” he said. “The easy-to-find, lower-cost oil has been found around the world. We are going to have to look at alternatives and the most economical and environmentally responsible way of producing the oil sands.”

With pipelines the missing link between Alberta’s deposits and Gulf Coast refiners, several proposals to build them have emerged in recent years.

Keystone, which TransCanada is developing with partner ConocoPhillips, emerged as the frontrunner in July when it announced it had secured shipper support to expand and extend all the way to Port Arthur. The first phase, targeting the U. S. Midwest, is now under construction.

Rival Enbridge Inc. announced in August a $2.2-billion plan with partner BP to reconfigure existing pipelines to move oil sands production to Houston.

TransCanada’s Mr. Girling said Keystone will eventually move 900,000 barrels a day of Canadian oil to the Gulf Coast in the next five to six years, in addition to 500,000 moving to Midwest refineries by 2010. TransCanada stands ready to build a lateral to Houston if needed.

Once built, the pipeline highway will make landlocked Alberta producers worry for the first time about hurricanes. Port Arthur was hit hard by Hurricane Ike, which flooded homes and streets, and caused refineries to suspend operations. As for Gulf refiners, they will get to know the challenges of extracting oil in Canada’s north, such as when an Arctic cold snap turns off the tap for a while.

ccattaneo@nationalpost.com

© National Post 2008

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PUBLISHED BY ‘CANADA.COM’

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