The Refinery Eating Alberta’s Money
(Bloomberg) -- While Alberta Premier Rachel Notley touts new refineries to ease the Canadian province’s oil woes, one government-backed plant has been eating up taxpayers’ money without giving anything in return.
The North West Redwater Partnership’s Sturgeon refinery some 350 kilometers (215 miles) north of Calgary -- partly designed to process as much as 37,500 barrels a day of oil-sands bitumen that Alberta collects from producers as royalty payments -- is months late in honoring its part of the deal.
Yet, since June, the province has been paying the unit an estimated C$750,000 ($560,000) a day in fees anyway, according to estimates by Brian Livingston, executive fellow at the University of Calgary’s School of Public Policy.
That’s because an agreement originally drafted in 2011, before Notley’s time, required a provincially owned corporation to start paying fees to the refinery in June 2018, regardless of whether the unit was actually processing anything. To make matters worse, the fee has increased because it’s linked to the project’s rising operating and borrowing costs.
The imbroglio highlights the kinds of unexpected pitfalls Alberta might be setting itself up for with a slew of moves to rescue its beleaguered oil industry. The province is buying tank cars to ship crude by rail to the U.S. Gulf Coast, offering funding for prospective refinery and crude-upgrader projects and is limiting the amount of oil companies can produce, a bit like an OPEC country.
“My guess is that they have probably learned a bit from this in terms of how they position themselves for future deals,” said Jason Parent, vice president of consulting at Kent Group Ltd. a downstream consultancy based in London, Ontario.
The Sturgeon refinery hasn’t started processing Alberta’s heavy crude yet because it experienced equipment failure in a unit, which is the “main cause of the delay,” the company said in a Feb. 7 statement. It will update its timeline on the start of bitumen processing early this year “after additional progress on repairs and tests are completed.”
Alberta is “carefully” advancing a strategy to do more refining and upgrading locally and “we share the spirit” of North West Redwater’s goals, Michael McKinnon, a government spokesman, said in an email. The province “still expects to see a net benefit to Albertans over the long term.”
The amount the government has paid in fees to the refinery hasn’t been disclosed but is anticipated to be included in a report this year, McKinnon said.
To be sure, there’s a very compelling reason for Alberta to seek creative ways to encourage local refining: It produces more crude than it can ship and that sent local prices plummeting last year.
North West Redwater is a venture between Canadian Natural Resources Ltd. and closely held North West Refining Inc. The government’s support for the Sturgeon refinery and an accompanying carbon capture and storage project was controversial early on. The project’s cost has more than doubled to C$9.7 billion as of last year. The government’s support for the venture included C$432 million in loans.
Julie Woo, a spokeswoman for Canadian Natural, declined to comment. North West Redwater didn’t return an email seeking further comment.
The first phase of the refinery was supposed to receive 75 percent of its feedstock from the province in the form of bitumen, which the plant would process into diesel and other fuels for a fee, and then sell on behalf of the province. The other 25 percent of the refining capacity is reserved for Canadian Natural. All told, when including the diluent that is mixed with bitumen, it has a processing capacity of about 80,000 barrels a day.
The refinery started operating more than a year ago, processing some light synthetic crude but none of the province’s bitumen at the moment.
Meanwhile, North West is raking in the fees.
©2019 Bloomberg L.P.