The state-owned energy companies in Mexico and Venezuela are falling behind in oil production. Consequently, they are supplying progressively less crude to major refineries in the southern United States. Refineries in Texas, Oklahoma and Louisiana are becoming more dependent on supplies from Alberta’s Oil Sands. This may not be quite the bonanza that it seems, however, due to a quirk of segmentation in oil production.

Tar Sands output, whether derived from open-pit mining or the SAGD approach (steam-assisted gravity drainage), first delivers bitumen. This is the very thick oil that needs to be processed in an upgrader to yield a lighter crude that can then be “cracked” further in refineries to yield a variety of grades and by-products. These include gasoline for driving, diesel fuel, jet fuel and a whole range of derivatives that are used by the petrochemical industry, including butane, methane, ethane, ethylene, polyethylene and so. The latter are the raw matter for plastic and PVC pipe, plastic bottles, garbage bags and packaging.

Besides the Oil Sands, Canada’s petrochemical refining industry is largely located in Red Deer and Joffre in Alberta; Lloydminster on the Alberta-Saskatchewan border; Sarnia, Nanticoke (e.g., asphalt) and Oakville in Ontario; east-end Montreal; and Saint John, NB. High-end derivatives from fossil fuels can also come from processing natural gas.

As for investment decisions about what to build in Alberta’s Oil Sands – i.e., upgraders in addition to extraction projects, both of which involve huge expense − a key determinant is the price of bitumen versus the benchmark international price of oil. There are several standards that are used, with West Texas intermediate being perhaps the primary one.

Bitumen has historically been about 30% cheaper than crude oil. In the past, this has provided an incentive to upgrade bitumen where it is found. But due to declines in supply from Mexico and Venezuela, the price gap has narrowed considerably. The return on bitumen is approaching the price of crude oil. This lowers the profit on upgrading it.

Therefore, some major producers in Alberta are opting to ship bitumen to existing upgraders in the U.S. south and postpone their own plans. This is a big disappointment for construction and energy sector workers and for the provincial government. Many of the higher-end jobs are in refining. That is also where the most “value-added” occurs.