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Suncor Energy Inc. is sounding increasingly enthusiastic about a $1-billion investment in its Montreal refinery to process oil sands bitumen. .JEFF MCINTOSH/The Canadian Press

Suncor Energy Inc. is sounding increasingly enthusiastic about a $1-billion investment in its Montreal refinery to process oil sands bitumen. But the company must overcome a number of regulatory and political hurdles – including an aggressive climate policy in Quebec – before it can proceed.

The Calgary-based producer has announced that it will proceed with its partners on the $13.5-billion Fort Hills oil-sands mining project, which will produce 180,000 barrels of bitumen per day. Earlier this year, Suncor cancelled the proposed Voyageur upgrader, opting instead to ship the diluted bitumen to refineries for processing.

In announcing the Fort Hills project, Suncor chief executive Steve Williams said the company's Montreal refinery could be a destination for at least some of the company's bitumen production.

For that idea to go ahead, federal regulators must first approve at least one of two pipeline proposals that would carry western crude into Quebec, Mr. Williams said. As well, Suncor would have to upgrade the Montreal refinery to process the heavy bitumen produced in the oil sands.

The National Energy Board is reviewing Enbridge Inc.'s plan to reverse its Line 9B to carry crude from Ontario to Montreal. While the company has said it expects to primarily move conventional light oil, it has sought permission to carry heavier diluted bitumen. Meanwhile, TransCanada Corp. is expected to soon file an application to convert a portion of its main national gas pipeline to carry crude from Alberta to eastern Canada.

Suncor will also have to assess the impact of looming federal and provincial emissions regulations that will impact the competitiveness of Canadian refining operations, especially the energy-intensive processing of bitumen.

The company halted a plan by PetroCanada to equip its Montreal refinery with a coker – a key unit for processing heavy crude – when the two firms merged in 2009. Suncor is now storing equipment on site, including massive coker drums that have been kept under a nitrogen blanket to preserve them.

"That is a very low-cost coker project, probably something like 25 to 30 per cent [of the cost] you'd expect on a grassroots coker on a per barrel basis," Mr. Williams said in a conference call last week. "We have a very attractive option that we will review once we start to see the [pipeline] logistics open up, whether that be [TransCanada's] Energy East or Line 9. Suncor supports them both."

Analysts say Suncor would benefit from having a new market for its bitumen, even though Mr. Williams said the company has had little trouble finding high-priced markets for its crude. With oil sands production expected to grow dramatically and little new upgrading capacity planned in Alberta, there will be a flood of additional bitumen coming on the market over the next decade.

University of Alberta energy economist Andrew Leach said the economics of refining diluted bitumen will depend on the price gap between light and heavy grades of crude. "It makes sense unless you have a big narrowing of the light/heavy differential," Mr. Leach said. But he added that those spreads are difficult to forecast, especially with the boom in light production from places like North Dakota's Bakken and Texas' Permian basin.

Michael Dunn, an analyst at FirstEnergy Capital Corp., said he doesn't believe Suncor is in a rush to make a decision on the Montreal coker. Moving forward on the project is more tied to crude supply options such as the reversal of Line 9 for the Montreal plant than to the development of Fort Hills, he said.

"That decision should be mostly based on what the access is for heavy crudes in Montreal and how the economics look there," Mr. Dunn said.

Those economics will likely be affected by increasing regulatory costs as governments impose new rules on greenhouse gas emissions.

Ottawa has promised more regulations on Canadian refiners that will add to processing costs, while Quebec has implemented a cap-and-trade system on large emitters like refineries and in the future may substantially increase the cost per tonne of carbon. Refining diluted bitumen consumes considerably more energy – and creates more emissions – than processing conventional light crude.

"We're very cognizant of the risk that Canadian refiners could find themselves at a competitive disadvantage if they have to incur compliance costs for [greenhouse gas] regulations that are not incurred by their competitors in the U.S.," said Peter Boag, president of the Canadian Fuels Association, which represents the refining sector.

"Moving faster and farther than those jurisdictions with whom we compete can put a drag on investment," Mr. Boag said.

With a report from Jeffrey Jones