Alberta government wins one, loses one

Hope of new taxes from value-added processing, refining of oil sands bitumen takes hit when Husky buys Ohio plant; Total saves day

Gary Park

For Petroleum News

The Alberta government’s hopes of prospering from the value-added processing and refining of oil sands bitumen took another, not unexpected dent, when Husky Energy opted to buy the Ohio refinery of Valero Energy rather than build a plant on home turf.

The Lima, Ohio, refinery, with throughput capacity of 165,000 barrels per day, will cost Husky US$1.9 billion and that’s just for openers.

But it wasn’t a total strikeout for the Alberta government, when the Canadian affiliate of Total announced it is proceeding with a 200,000 bpd upgrader near Edmonton, another element in its integrated oil sands strategy that could see the French giant invest up to C$15 billion over the next decade.

Total E&P Canada President Michael Borrell delivered a welcome message to the Alberta government when he declared Total is “committed to upgrading the bitumen we produce and we believe the best place to do that is in the Industrial Heartland, so that Albertans experience the benefits of this activity.”

He described the upgrader as the “third pole” of an oil sands plan that includes a mine and an in-situ operation in the Athabasca region that underpin Total’s intention to “make Alberta home for a long time to come.”

The Total upgrader involves a first stage of 130,000 bpd of light sweet synthetic crude to be commissioned by 2013 or 2014, with a second phase adding 70,000 bpd.

Total E&P has an 84 percent stake in the Joslyn oil sands lease, with Enerplus Resource Fund holding the balance, after acquiring Deer Creek Energy in 2005 for C$1.7 billion. It is also involved as the 50 percent partners in the ConocoPhillips-operated Surmont project that is targeting 100,000 bpd by 2010.

Borrell told the Globe and Mail the oil sands interest Total “because they have all the elements we like about projects. They’re technically challenging, they’re long term. A company like ours has the ability to add significant value.”

The upgrader alone calls for a peak construction workforce of 4,000 and a permanent payroll of 300 to 400.

Valero conversion estimated to cost C$2.9 billion

But Husky Chief Executive Officer John Lau, who has dropped a series of hints that his company would rather buy assets in the United States than build in the hyper-inflationary atmosphere in Alberta, said the purchase “represents a significant step in Husky’s ongoing strategic move of expanding our downstream business and supports Husky’s objective as a fully integrated energy and energy-related company.”

He said the transaction should have an immediate “positive financial contribution to Husky’s earnings and cash flow.”

Lau said integration of the Lima refinery with future growth of heavy crude oil and oil sands production is part of Husky’s goal of enhancing returns to investors.

Valero Chief Executive Officer Bill Klesse said the purchase will give Husky a home for its “growing supply of Canadian heavy crude,” which is targeted at 500,000 bpd by 2020, including its 200,000 bpd Sunrise oil sands project, for which it has yet to settle on an upgrader solution.

The company currently holds leases covering 510,000 acres in the Cold Lake and Athabasca regions of northern Alberta and is venturing into new regions that pose more complex challenges to extract the raw bitumen.

Not the first move to U.S. refining

Husky is just the latest in a string of Canadian companies that have spent C$3.7 billion over the past four years acquiring downstream refining capacity for Alberta’s rising heavy oil and synthetic crude volumes.

Suncor Energy picked up two Denver-area refineries for C$125 million and Connacher Oil and Gas paid C$55 million for a small Montana plant as a prelude to Encino striking a blockbuster deal with ConocoPhillips last year to establish an integrated North American heavy oil business.

EnCana swapped a half-interest in its Foster Creek and Christina Lake operations in return for 50 percent of ConocoPhillips 306,000 bpd Wood River refinery in Illinois and 15 percent of its Borger refinery in Texas, rising to 50 percent after 2008.

Marathon Oil is inviting bids for a US$1 billion upgrade of its 100,000 bpd Detroit refinery to run exclusively on Canadian feedstock.

Alberta wants more refining in province

The industry counters that without a refinery, regardless of where, nothing will be spent on upstream projects, which yield considerable benefits to Alberta.

A new study by Colt Engineering estimates that C$130 billion will be pumped into the Edmonton-region economy alone from nine upgrader plants in various construction or planning stages.

It figures basic procurement needs during the 2008-15 construction years will range from C$19 billion to C$33 billion with another C$100 billion to be spent on supplies and services once the facilities are operating.

The study based its finding on bitumen output rising to 3.5 million bpd by 2020 from 1 million bpd currently — a more ambitious goal than most forecasters, who settle around 3 million bpd.

But this overheated environment, along with uncertainty over the impact of climate-change plans and the prospect of higher royalties in Alberta, has prompted Canadian Natural Resources to shelve a 125,000 bpd heavy oil upgrader that could have cost C$6 billion to C49 billion.

The company is also increasingly certain that modifications and expansions of U.S. Gulf Coast refineries will be major consumers of Canadian heavy crude, making heavy capital investments in Alberta unnecessary, said Canadian Natural President Steve Laut.

The upgrader would have handled output from the independent’s Primrose, Wolf Lake and Kirby projects.

Rather than pushing ahead with the final two stages of engineering and scoping work, Canadian Natural has put everything on hold, without actually canceling the plan outright.