Harvest spreads wings, buys refinery

Gary Park

For Petroleum News

Harvest Energy Trust has moved Canada’s income trust sector into a whole new realm, buying a Newfoundland oil refinery to become a fully integrated operation from exploration to processing.

It is paying C$1.6 billion for the North Atlantic Refining facility at Come-by-Chance, plus 69 gas stations and a home heating business, picking up an asset that many other leading refiners apparently shunned.

But Harvest Chief Executive Officer John Zahary is entering the downstream certain that the refinery represents all positives and no negatives.

He said North Atlantic’s expected operating life of at least 30 years raises Harvest’s lifespan to 16 years once its oil and gas reserve life index of 9.5 years is taken into account. Despite the volatility of refining margins, Zahary is confident that given the “under-investment” in North American refineries and the absence of plans for any new facilities profit margins should stay robust for a minimum of five years.

However, Harvest executives were not overly eager to commit themselves to spending as much as C$800 million which previous owner Vitol, the Swiss oil trader, estimated would be needed to expand and upgrade the refinery to produce the RBOB blendstock that is eagerly sought following the U.S. ban on the MTBE gasoline additive.

Asked whether he would make that kind of capital investment, Zahary said “that is something that over time the owner … should do to capture maximum value. We hope to do that under the Harvest ownership.” Beyond that he offered no timelines.

For now, Zahary said, the plant processes 115,000 barrels per day of crude, mostly medium sour feedstock, from the Middle East, Russia and Latin America. The end products are largely for export to New England and New York.

Harvest said North Atlantic has enjoyed steady growth over the past 12 years since Vitol became the owner and invested C$600 million on modernizing the plant, with current clean-fuel exports worth more than C$2 billion a year.

Zahary said the refinery “is very we’ll run and has a good reputation for operating performance,” being rated No. 2 among Canada’s 16 refineries in 2004.

But those results were not enough to entice such leading takeover candidates as Valero and Petroplus.

North Atlantic has a colorful past, opening in 1974 under Shaheen Natural Resources, quickly closing with the loss of tens of millions of dollars of Newfoundland government money in a C$500 million bankruptcy, being picked up in the late 1980s by Petro-Canada for C$17 million, faltering again before being sold to U.S. convenience chain Cumberland Farms for a nominal C$1, before being acquired by Vitol.

High-flying Harvest has made two purchases of E&P companies in the past nine months totaling C$2 billion, lifting its forecast production for 2007 to 65,000-67,000 barrels of oil equivalent per day, joining the top bracket of trusts.