The emerging next generation of Alberta oilsands projects has provide an early example of how new technology will make oilsands a contributor to natural gas supplies rather than just a drain. About 22 Bcf/year of gas will eventually be put back on the market as a result of an agreement between fertilizer manufacturer Agrium Inc. and the 100,000 bbl/d Northern Lights oilsands project.

The arrangement will enable Agrium to stop buying gas as the raw material for a plant near the Alberta capital of Edmonton by replacing it with hydrogen purchased from Northern Lights as a byproduct of the “upgrader” in its oilsands project. Like other new entries in the C$100 billion (US$90 billion) oilsands project lineup, Northern Lights will make hydrogen required to lighten tarry bitumen into refinery-ready oil.

The next generation of plants, along with expansions of established production complexes, incorporates new ways to extract gases and other industrial process materials from heavy carbon compounds in initial oilsands output. In addition to hydrogen, Agrium will take nitrogen, carbon-dioxide and sulfur byproducts of the oilsands upgrader. The fertilizer maker and Northern Lights agreed to negotiate a long-term supply contract by the time the oilsands project is scheduled to go into production in 2010. Hydrogen prices were not disclosed and remain part of the package still under negotiation.

But the supply commitment to Agrium includes assurances that the byproduct will be more stable and predictable than natural gas, the companies said. Hydrogen prices will not only be low compared to natural gas under the arrangement. Hydrogen will also not be tied to gas prices on Alberta’s AECO trading network or on the New York Mercantile Exchange, the companies said.

At the initial upgrader design capacity of 100,000 bbl/d, essentially all its hydrogen output not required for its own bitumen processing, will be taken by Agrium, Northern Lights operations chief Steve Gilliland said. But past that production level — and like all oilsands projects, Northern Lights owns ample reserves to support growth — more hydrogen will become available for sale as a gas substitute. Fertilizer and petrochemical plants are keenly interested in gas substitution if their processes make it possible.

Richard Downey, Agrium’s investor relations director, said natural gas is by far the biggest item in its plant’s budget, accounting for up to 80% of manufacturing costs. The hydrogen supply deal assures Agrium that its main western Canadian plant will be competitive with natural gas-based rivals everywhere else on the planet, Downey said.

That includes areas like the Middle East where prices of gas as an industrial raw material are far lower than in Canada, he added. The next wave of oilsands projects improves the likelihood of making such contributions to gas supplies as a result of a new trend in plant locations as well as improving technology. While bitumen mining and extraction continues to take place atop the oilsands reserves in the Fort McMurray region 500 kilometers (300 miles) northeast of Edmonton, locations near the Alberta capital are being selected for new upgrader plants.

Five upgrader projects are in various stages of design, regulatory review and construction in the Edmonton area, in heavily developed region around the nearby communities of Redwater and Fort Saskatchewan which is organized for planning purposes as Alberta’s Industrial Heartland. The sites were chosen as sure to improve project cost control, labor and equipment supplies and proximity to customers by comparison with past practice of building upgraders on remote Fort McMurray oilsands leases.

The more accessible locations also put the new upgraders close to Alberta’s principal petrochemical and fertilizer manufacturing operations near Edmonton and the Joffre area about 160 kilometers (100 miles) farther south.

Agrium said the main modifications required for its plant to convert to hydrogen from natural gas will be utilities and other infrastructure to connect to the nearby Northern Lights site.

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