Sunday, February 14, 2010

You can't push a rope up a hill

<$BlogMetaData$>February 17th, 2010

You can’t push a rope up a hill.

Last Friday’s Yankton’s Press & Dakotan had a story in the business section of the business leader’s annual trip to Pierre. Of course they met with our illustrious governor and he was slobbering the Hyperion smoothies. He said some construction is expected to begin during 2011, but the heavy lifting won’t start till 2012.

Oh come on now. Let’s get real. He also said – now get this – “their business plan appears to be solid yet.” “I’d just as soon have it being done here and have the citizens of South Dakota be able to take advantage of part of the huge economic impact it has. I think Yankton will benefit from that, as well.” Have you ever heard such baloney in your life? Makes me want to throw up – again – Doesn’t anyone think about anything but economic development? I’m so sick of hearing “ECONOMIC DEVELOPMENT.”

Coincidentally I got a response last week from the governor to an email that I sent him after his remarks in Yankton two weeks earlier. He had mentioned that the developer would start construction in 2012 and I had asked him who the developer was. Are you ready for this? He said the developer was Hyperion. He said that Hyperion was also focusing on two other parallel tracks. They range from obtaining additional permits and consents to local building permits and permits to discharge treated water. On the other track the project is working to further secure a crude oil supply. Now there must be something in the air out in Pierre because he’s losing it. When I was in the Air Force, they called it wacky tabacky!

It might be a solid waste plan, but business plan it isn’t. Evidently neither the governor nor his staff read the papers and industry releases. Here are portions of a business release from Canada’s Globe and Mail this week about tar sands, which is going to be Hyperion’s oil supply.

1) The uncertain future for tar sands was brought more sharply into focus when it emerged that Suncor and Imperial Oil (60% owned by Exxon Mobile) are appealing to a US regulator to force Enbridge to hold back on increasing pipeline tolls from Canada because they say Enbridge is building too much pipeline capacity for tar sands oil into the U.S.

2) TransCanada’s Keystone XL pipeline proposal, which is slated to bring 500,000 b/d of tar sands crude to the Gulf Coast by 2013, will result in around 41% excess capacity in Canada-US pipeline systems, according to the G&M article. That means that on top of paying some of the most expensive capital costs in the oil industry to pull tar sands crude out of the ground, producers will be paying a premium to get it to refineries, while refineries will be paying the extra costs of processing the heavy sour crude into products that are decreasingly in demand.

3) The problem as the oil producers see it, is that since they signed up for Clipper back in 2007, the outlook for tar sands has deteriorated sharply and they are unsure how much tar sands crude they will have available to pump through Enbridge’s new line. The contract between Enbridge and oil producers guarantees Enbridge revenue making it more expensive for oil producers to use only a portion of their allotted capacity. Suncor’s filing to the US regulator stated that, “Shippers are not required to pay for a pipeline that did not need to be placed into service”.

4) “We're planning for startup in 2013, and one of the things we have to do is secure the feedstock, so we're making a proposal to the Alberta government to process their bitumen royalty volumes," said Ian MacGregor, chairman of North West. If all the pieces fall into place, construction could start in 2011, Mr. MacGregor said. The companies gave no cost estimate for the plant, which is designed to turn extra-heavy crude into low-sulfur diesel fuel and other petroleum products. North West had previously said the plant would process 231,000 barrels a day, starting with a 70,000-barrel-a-day phase costing about $4-billion. That capacity is made up of 50,000 of raw bitumen and the rest light fuel used to move the crude in pipelines.

5) North West deferred construction plans as the credit crisis took hold in 2008. It said last year that the Alberta government's bitumen-in-kind proposal had the potential to put the project back on track. --Canadian Natural Resources Ltd., the country's biggest independent oil explorer, is buying into a multibillion-dollar upgrading plant that was stalled by the financial crisis, the latest in a raft of announcements showing the oil-sands sector on the rebound. Canadian Natural said it will buy 50% of privately held North West Upgrading Inc., which plans to build an upgrader near Edmonton for an undisclosed sum.

6) The two companies will apply to take advantage of an Alberta program aimed at stimulating processing of its vast oil sands within the province, rather than shipping the resources and jobs elsewhere. They hope the government will supply 75%, or 37,500 barrels a day, of the raw bitumen for the plant from volumes it will take in from developers in lieu of cash royalties. Canadian Natural, one of Alberta's largest producers of heavy oil and oil sands, would supply the rest

If one reads just the 6 sub topics I’ve listed you have to shake your head and wonder what the Governor, Hyperion and pro Hyperion folks thinking. They can’t contract for something that isn’t there can they? I mean how stupid do they think we are? I’ve always hears that if you are going to dream, dream big ones, but come on now. I think it is time for them to do a reality check don’t you?

North West says it will cost $4 billion just to produce 70,000 barrels a day. If it costs this much to produce 70,000 b/d what is it going to cost for 400,000 b/d and who is going to pay it? There isn’t anyone that will be producing 400,000 barrels a day so where does Hyperion think they are going to get all the tar sands. North West is going into partnership do develop tar sands in Canada so it won’t be outsourced and they will keep money in Canada. Even with the start up in 2013 it will be several years before they come online. I just can’t figure this out any more. The figures and the dates don’t match, so Hyperion is trying to push a rope uphill.


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