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Refinery newcomer on the prowl Trust prepared to gamble C$2 billion on an expansion of its Newfoundland plant, looking for a partner to share the risk
By Gary Park For Petroleum News
Canadian refining novice, Harvest Energy Trust, is ready to gamble C$2 billion on an expansion of its Newfoundland plant, so long as it can find a partner willing to share the risk.
The trust’s daring move into the high-stakes refining sector two years ago has convinced it there is demand for a 75,000-barrel-per-day addition to its 115,000 bpd North Atlantic refinery, allowing the processing of heavier crudes that yield better returns.
The plan involves upgrading the “negative-margin, high-sulfur” fuel it currently produces into higher-margin distillate and gasoline products, Harvest chief executive officer John Zahary said, noting that the objective is to steer the facility toward processing more diesel fuel oil and less gasoline and heavy heating fuels.
“The project is all about more and cheaper feedstock making more and better quality products,” Zahary said.
Must like the refinery business He said the trust has been approached by potential partners in the two years since it paid C$1.44 billion to acquire the refinery, formerly known as Come By Chance, from Swiss oil trader Vitol.
But, acknowledging the shaky state of global markets as a possible deterrent to investors, Zahary said anyone thinking of becoming a partner “won’t be interested in this sort of refinery investment if you don’t like the refinery business … that’s a non-starter.”
As a result, he agreed the search will be challenging.
To aid the process, Harvest has hired Deutsche Bank, which advised Vitol on the 2006 deal with harvest, to flush out interested parties.
Harvest itself is certain it is on the right track in eying an expansion based on preliminary studies covering technical feasibility and plant reconfiguration designs.
In addition, a recently completed analysis by construction engineers SNC-Lavalin has “validated” the trust’s internal work.
Prize is 25-30% stake in refinery Zahary said the upgraded facility would continue buying crude from South America, Russia and the Middle East, but it would add heavier crudes, with the products targeted at the same markets the refinery serves today, with distillate going to Europe and gasoline to New York and Boston.
He indicated Harvest would expect a partner to potentially finance all or most of the upgrade costs in exchange for a 25 to 30 percent stake in the refinery.
He said the estimated return on investment and other financial metrics are “compelling.”
Jason Crumley, a Salman Partners analyst, said that given Harvest’s “fairly levered” balance sheet, a partner would reduce the trust’s exposure in a volatile refining market.
However, he said that if the upgrade can be completed it would be a “fairly significant” refinery in North America and should be able to generate a fairly strong cash flow.
UBS Securities Canada analyst Grant Hofer said in a note to clients that lining up a partner could be “very challenging” because of the project risks.
Partner wanted for Alberta heavy upgrader On another Canadian refining front, privately-held North West Upgrading has recruited a new top executive to improve its chances of finding a partner for a planned merchant heavy upgrader in Alberta.
The company has appointed Doug Quinn, a former manager with Shell Canada during the design and construction stages of its Athabasca oil sands project and who has since worked with Washington State’s Puget Sound refining, as its new chief executive officer.
He will take over as CEO from Rob Pearce, who will become senior vice-president of corporate development.
Pearce said the hiring will allow North West to take the next step in its C$4 billion-$5 billion upgrading project “subject to financing.”
So far the company has lined up only one supply agreement with oil sands producers to secure bitumen feedstock and is at least a year away from starting construction of the upgrader near Edmonton.
The plant is designed to process bitumen into low-sulfur diesel and diluent.
The first phase was supposed to have come on stream in spring 2009, handling 70,000 bpd of bitumen, but North West was unable to arrange financing. The startup has since been postponed to 2012.
During these delays, the anticipated cost of the upgrader has climbed from C$1.6 billion to C$4.2 billion in 2007, partly because of a lawsuit from a group of unhappy investors.
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