The size of Alberta's heavy oil resource has been well documented with all the superlatives regarding its size. It is truly enormous with established reserves of 178 billion barrels and potential recoverable reserves of 315 billion barrels. However, the logistics of recovery, upgrading, and transportation to market are daunting.

Even after the challenges of production, utilization of the produced bitumen is far from straightforward. It is too viscous to transport by pipeline and not processable by the vast majority of existing refineries. Thus in order to develop a mass market, the bitumen must be upgraded to a quality that can be processed by the existing North American refinery market.

Since upgrading bitumen is an energy intensive operation, the impacts of Canada's ratification of the Kyoto Accord must be considered.

The intent of this paper is to analyze the factors impacting which method of upgrading to follow and give some illustrative examples.

Markets And Demand

A recent study (1), "Markets For Canadian Bitumen- Based Feedstock", was undertaken by the Canadian Energy Research Institute (CERI) to determine market potential in 2007 for diluted bitumen and synthetic crude oil produced by the upgrading of bitumen. In doing so, CERI assessed the economic viability of a wide range of bitumen feedstocks relative to their refining values. The sensitivity of refinery demand to the prices of these feedstocks was examined, as well as the competitiveness among bitumen-based feedstock and conventional crudes.

The three major markets for Western Canadian bitumen based feedstock are PADD II in the USA, Western Canada, and Ontario. In 1998, these markets consumed 54%, 31% and 12% respectively of the total bitumen based feedstock produced. PADD II includes the US Midwest.

CERI concluded that potential demand in 2007 for bitumen based blends in the Western Canadian producers' natural markets of PADD II, Western Canada, and Ontario will be about 555,000 bpd. The demand for synthetic crude oil, derived from bitumen, was estimated to grow to 806,000 bpd. This represents 244,000 bpd of incremental demand for bitumen-based blends and 450,000 bpd of incremental bitumen derived synthetic crude oil demand over 1998 consumption. In comparison, the Alberta Energy and Utilities Board (2) (AEUB) has estimated the incremental demand for non upgraded bitumen products to be approximately 315,000 bpd while the incremental demand for synthetic crude is estimated at 535,000 bpd by 2007.

Based on the incremental demands shown above, the market share for the bitumen feedstocks increases from about 14 percent in 1998 to about 25 % in 2007. To achieve these results, bitumen based blend must replace US and Canadian conventional crudes, while synthetic crude oil replaces imports from outside North America. While both bitumen-based blends and synthetic crude oil are expected to show significant growth, synthetic crude oil is expected to grow faster. Ultimately the demand for bitumen blend will be capped by North American refineries ability to convert it to transportation fuels.

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