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December 2013
Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.
Vol. 18, No. 50 Week of December 15, 2013

Alberta rescues cost-hit refinery

Government provides additional C$300 million loan to Redwater after costs soar by C$2.8 billion, argues risk of revenue, jobs loss

Gary Park

For Petroleum News

Those puzzled by the reluctance of big energy companies to enter the refining/upgrading sector of Canada’s petroleum industry without a government safety net have got part of their answer from the stunning rise of costs for an Alberta government backed plant.

A joint venture by privately held North West Upgrading and a wholly owned unit of Canadian Natural Resources has disclosed that the 50,000 barrels per day Redwater refinery near Edmonton has ballooned in cost to C$8.5 billion from C$5.7 billion, while the start of commercial operations has been delayed to September 2017 from mid-2016.

A portion of the provincial government’s royalty bitumen, collected in lieu of cash royalties, will provide 75 percent of the project’s feedstock, with Canadian Natural’s in-situ production making up the balance.

The Alberta bitumen will be processed under a 30-year fee-for-service agreement between the plant’s owners and the Alberta Petroleum and Marketing Commission, a provincial agency which is responsible for selling 70,000 bpd of conventional crude.

Also CO2 spinoff

Another intended local spinoff is the Alberta Carbon Trunk Line or ACTL that will capture carbon dioxide produced by the refinery and deliver it by a pipeline owned and operated by Enhance Energy to central Alberta for use in enhanced oil recovery.

Enhance President Susan Cole said that despite the startup delay her company remains on track to have ACTL running within about two years.

The refinery is Canada’s first in many years and underpins the Alberta government’s goal of processing more oil inside the province to increase the value of bitumen extracted from the oil sands.

Following the announcement of the surge in capital costs, the government said it has agreed in principle to provide a C$300 million loan to the Redwater partnership, along with a matching contribution from Canadian Natural.

Energy Minister Ken Hughes, prior to being transferred Dec. 6 to the municipal affairs portfolio, said the government would face a greater risk from the project being abandoned, noting that the province is “obviously quite substantially committed to it already.”

He said the risks of “standing still are exceedingly large ... in the order of billions of dollars per year of lost revenue because we don’t have adequate access to outlets either through value-added in Alberta or to global markets.”

Hughes also said the refinery would “strengthen our economy by creating thousands of jobs.”

Alberta expects higher return

Once Redwater is built, Alberta expects to receive a higher return from its raw product as the facility converts heavy oil bitumen into more valuable light crude and diesel fuel.

Hughes said that prospect is vital because of the “crushingly difficult” differential in price between conventional light crude and output from the oil sands because of a lack of market access.

University of Alberta energy economist Andrew Leach said it has been difficult to access the merits of the deal because there has been little disclosure from the government.

But he said it appears the government will invest an estimated additional C$2 billion into the project through higher tolls that it will pay to process its bitumen.

The processing fee is intended to allow North West to make a rate of return on its invested capital to pay off debt and recover operating costs.

Original cap waived

Leach said the province has waived an original cap of C$6.5 billion and will eventually pay for the higher construction costs.

In addition to paying higher fees, the government is now loaning money and has agreed to advance additional funds if they are required, in return for receiving a 25 percent voting right on some elements of the refinery’s construction and operation.

“We’re at the table with industry to ensure that we have input at critical moments when we feel we need it,” Hughes said.

Rob Anderson, finance spokesman for Alberta’s opposition Wildrose Party, said the bottom line is that the government is taking on more risk.

He said that if the investment was so good the private sector should have shouldered the costs.

Instead, Alberta is “kind of up the creek without a paddle,” Anderson said. “It’s absolutely not the role of government to be doing something like this. Governments are not in the business of backing loans and picking winners and losers.”






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Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law.