Report finds Alberta’s North West Redwater Sturgeon Refinery’s prospects of making money are bleak

Construction of the North West Refining (NWR) Sturgeon Refinery in Redwater, Alberta on Aug. 30, 2016. THE CANADIAN PRESS IMAGES/Larry MacDougal
Canada’s first new oil refinery in 34 years has already been criticized for its soaring project costs and now the North West Redwater [NWR] Sturgeon Refinery north of Edmonton is being criticized in a damning report out of the University of Calgary.
“The NWR Sturgeon Refinery seemed like a good idea on paper,” said a news release from the university’s School of Public Policy, “[but] Albertans are on a very long-term hook for a refinery unlikely to ever make money.”

The report, titled “The North West Redwater Sturgeon Refinery: What are the Numbers for Alberta’s Investment?,” was authored by Brian Livingston and released on Wednesday.

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The research is based on an economic model that makes assumptions on a number of variables and concludes that in its first full year of operation in 2019, the facility’s partners – the Alberta Petroleum Marketing Commission (APMC) and Canadian Natural Resources Ltd. (CNRL) – are projected to lose “a cash amount of about $24 million.”

“This loss is based on a comparison to the toll payers’ alternative of just selling the diluted bitumen feedstock at market prices,” the report reads.

“The [overall] risk [regarding the Sturgeon refinery project] is that it may turn out to be at best break-even and at worst, a money-losing proposition,” Livingston said at a news conference in Calgary on Wednesday.

“If the market conditions for feedstock – diluted bitumen – become very low and the value of diesel fuel becomes very high, it may be a profitable one… but the conditions we have today for diesel fuel are very favourable… and for WCS (Western Canadian Select) are very low. So I don’t think you can assume that the very favourable market conditions you have today will last for the full 30 years.”

Livingston suggested that while the Alberta government has been trying to encourage upgrading in the province since 2006, the Sturgeon refinery’s finances should give reason for the government to pause before investing further into it or other similar projects.

“The key point is, NWR Sturgeon Refinery has no risk,” he said. “Even though this refinery is not yet operating using diluted bitumen as feedstock, the terms of the tolling agreement said… tollpayers must start paying paying debt financing agreements for the senior debt on June 1.

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“The taxpayers of Alberta’s share… is about $30 million… It’s like saying, ‘you have to start paying rent on your apartment even though it’s not ready to move into.”

When the refinery project was first proposed in 2008, it was projected to cost about $4 billion. On Wednesday, Livingston said the most recent capital cost was at $9.7 billion and added, “90 per cent of this capital cost is financed by debt [and] only 10 per cent by equity – that’s very highly leveraged.”

READ MORE: Alberta refinery costs level at $8.5 billion, on track for start date

The project was championed by Ed Stelmach’s Progressive Conservative government and construction on the project began in 2013.

According to the refinery’s website, the facility has produced over 2.2 million barrels of diesel by processing synthetic crude oil into diesel since December 2017. Livingston said Phase 1 of the project is hoped to achieve commercial operation in the fourth quarter of this year.

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READ MORE: Alberta refinery hits milestone with 1st diesel production

Watch below: On Dec. 12, 2017, Fletcher Kent filed this report about diesel fuel now flowing from Canada’s first new refinery in more than 30 years.

Click to play video: 'Alberta refinery hits milestone with first diesel production'
Alberta refinery hits milestone with first diesel production

The refinery has been billed as a forward-thinking project in Alberta’s oil sector; it is seen as a way of upgrading raw bitumen without moving it out of province while also creating jobs and featuring an environmentally-friendly component through a carbon capture and storage plan.

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“The NWR Sturgeon Refinery is designed to process 79,000 barrels per day (bpd) of feedstock, consisting of 50,000 bpd of bitumen and 29,000 bpd of diluent (referred to as dilbit),” the report reads. “The refinery will produce petroleum products consisting of approximately 40,000 bpd of low sulphur diesel, 28,000 bpd of diluent and 13,000 bpd of other lighter petroleum products.

“It will also be able to capture 1.2 million tonnes per year of carbon dioxide emitted from the refinery’s operations. This captured carbon dioxide will be compressed, put into a pipeline and then injected into an existing oil field in order to achieve increased production of crude oil.”

Livingston’s recommends the government consider the risks of investing in the refinery’s Phase 2 and 3 plans.

“I have said, for Phases 2 and 3, take a good, hard look at that – if there’s such a good economic situation, why not let the private sector fund them?” he said. “There are three refineries currently in Edmonton, owned by Suncor, Imperial Oil and Shell, and all of those were built without any government assistance and all of those are doing fairly well from what I can see.”

In March, The Financial Post reported NWR and CNRL had suspended its plans for the second phase of the refinery project while they assessed the changing economics of the energy sector.

READ MORE: Group behind new Alberta refinery believes it could triple in size

Watch below: In December 2016, Tom Vernon filed this report about the ownership group investing into a new refinery north of Edmonton wanting to triple the size of the project.

Click to play video: 'Group behind new Alberta refinery believes it could triple in size'
Group behind new Alberta refinery believes it could triple in size

Livingston said if the government invests in bitumen upgrading projects like this again in the future, it needs to better explain what why it’s needed and what the benefits are to taxpayers.

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“If you’re there to create jobs, say how many dollars per job created,” he said. “I don’t think it’s good economic and public policy to say, ‘I’m going to build something just to create jobs.'”

“[The] bottom line for taxpayers [is], this is a 30-year deal… [and] you cannot get out of this agreement,” Livingston added.

“The taxpayer bears the risk for all the operating costs for those 30 years.”

On Wednesday afternoon, Alberta’s energy ministry provided Global News with a statement in response to Livingston’s findings.

“We believe it’s important to look at the long-term life of this project, as opposed to annual snapshots, and over that long-term we still [believe there is] a net benefit for Albertans,” the statement reads. “As we’ve said before, our government will be making all decisions on support for new private investment in energy diversification initiatives in the best interests of Albertans.”

Livingston recommends the government make more of an effort in the future to make numbers around projects like this more public, something he pointed out the auditor general also recommended in a report earlier this year.

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“What’s done is done and you can’t get out of it so just learn for the future,” Livingston said.

“Use this as a learning experience for future requests for government assistance. Avoid entering into open-ended guarantees with unlimited risk. You never like to have that kind of situation.”

Global News reached out to the NWR Sturgeon Refinery for comment on the day Livingston’s report was released and on Friday, the refinery replied with an emailed statement.

The statement can be read in its entirety below:

“The School of Public Policy at the University of Calgary recently released a report that contains a number of false assumptions about the Sturgeon Refinery. Financial analysis by independent third parties continues to show that the Sturgeon Refinery will provide positive results for Albertans.

The author of the School of Public Policy Report did not contact North West Refining Inc. to verify the economic assumptions on which the report is based or discuss the conclusions reached. For this reason, he did not have access to complete and accurate information about the project. As a result, certain of the assumptions and guesses about important elements of the project are factually incorrect.

The Conference Board of Canada completed a comprehensive and rigorous study of this project and spent considerable time with representatives of North West Refining Inc., to ensure that their conclusions were based on correct information. The Conference Board study estimates that the profits to the province from this refinery would average about $100 million per year over the life of the project, and that the total value-added impacts to the province would be $850 million per year.

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A number of established financial analysts have recently published reports concluding that complex refineries, like the Sturgeon Refinery, will be in high demand and margins from refining will continue to be strong for the foreseeable future.

Albertans need diversification options that maximize the value of our resources and allow existing pipelines to export more value. We need options that protect us from downward pressures on heavy, high-sulphur feedstock like bitumen.

As shipping constraints, environmental regulations and increasing supply of heavy feedstock continue to put pressure on bitumen prices, we remain confident that this project will generate significant economic returns to the people of Alberta. The focus of our entire team continues to be on the commissioning and smooth startup of the Sturgeon Refinery.”

You can read Livingston’s report in its entirety below.

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