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[Deer Hunter]

Refinery cost soars to $9.3 billion, prompting call for auditor general review


Reid Southwick, Calgary Herald

Last Updated: June 27, 2017 6:00 PM MDT
​
An oil refinery under construction in northern Alberta — already dubbed a multi-billion-dollar boondoggle by a former Tory minister — is now even more expensive, triggering calls for an investigation by the province’s auditor general.

A recent report by investment bank AltaCorp Capital estimates the Sturgeon plant near Edmonton, Canada’s first refinery in decades, will cost roughly $9.3 billion, up from the previous estimate of $8.5 billion.

The provincial government, which was already on the hook to backstop the project with $26 billion in tolling payments, said it will have to pay more after construction costs increased by $800 million.

Alberta Party Leader Greg Clark on Tuesday asked the auditor general to review the risks that the Sturgeon refinery poses to taxpayers, arguing the risks must be evaluated in the current environment of depressed commodity prices.

“Even though there have been some benefits for job creation, those benefits aren’t justified by the costs,” Clark said in an interview.

At full capacity, North West Refining’s Sturgeon plant would process 78,000 barrels of diluted bitumen into low-sulphur diesel fuel. With an estimated $9.3-billion price tag, the facility will cost $119,200 per barrel.

It will be the first refinery built in Canada in three decades, which means there are few comparisons to evaluate the costs.

Pacific Future Energy has proposed a refinery near Kitimat, B.C., that would process 200,000 barrels of oilsands bitumen per day, more than double the Sturgeon plant’s capacity.

The B.C. project is expected to cost $12 billion to $14 billion, which breaks down to $60,000 to $70,000 per barrel, up to half the cost of the Alberta project.

Still, Pacific Future said the project is still in its infancy, which means the costs will likely change.

“One big difference between us and (Sturgeon) is we’re not looking for government assistance, and (Sturgeon) has lots of it,” said Don MacLachlan, spokesman for Pacific Future.

Ted Morton, a former Tory finance minister, wrote a paper for the University of Calgary’s School of Public Policy in 2015 calling the Sturgeon project a “multibillion-dollar boondoggle with high risks for Alberta taxpayers.”

Under a 30-year contract, the Alberta government will supply most of the refinery’s bitumen, which it receives from producers in lieu of royalty payments, while paying a processing fee or toll for refining the product.

When the project was estimated to cost $8.5 billion, the tolls were worth $26 billion over the 30-year contract, which Morton said at the time was too high to ensure the province’s investment breaks even, let alone turns a profit.

The NDP government declined to disclose exactly how much more it will have to pay on its tolls until it releases its annual report on Thursday.

It said the previous Tory government committed to backstopping the refinery, noting that walking away would be even more expensive.

Ian MacGregor, chief executive of North West Refining, which owns half of the Sturgeon project along with Canadian Natural Resources, told the Alberta legislature in 2013 the project’s costs would not escalate beyond $5.7 billion.

“We plan to build it for $5.7 billion, and our fee structure runs out at $6.5 billion,” MacGregor said at the time. “I get a lot of questions about, what happens if this costs more than $6.5 billion? My answer is, it’s not going to. We meant $5.7 billion when we said it.”

The costs have spiked by more than 60 per cent in the past four years.

The construction schedule has also been pushed ahead. Two years ago, the refinery was expected to start producing diesel by late fall 2017, but AltaCorp said last week it will be fully operational in the first half of 2018.

North West Refining did not respond to requests for comment.

The escalating construction costs come at a time of depressed commodity prices, which raises questions about the return the Alberta government will get on its investment.

Energy Minister Marg McCuaig-Boyd has previously estimated Alberta will secure a profit from the refinery worth $200 million to $700 million.

Last year, Clark asked the auditor general to assess the Sturgeon project’s financial risks after the government increased its borrowing limit for the project, but was rebuffed.

rsouthwick@postmedia.com

What does a 30 year drain on the Alberta economy look like?
Drive by this refinery.

[bytchtyts]

I find it interesting that you neglected to bold this part:

It said the previous Tory government committed to backstopping the refinery, noting that walking away would be even more expensive.

Plenty of blame to go around on this one.

[Deer Hunter]

Crooked tories alright. The NDP has an opportunity here to clean this up. It wont be pretty.
Similar to unwinding the PPA and coal fired electrical generation...
What a mess this province is in.

[philintheblank]

At full capacity, North West Refining’s Sturgeon plant would process 78,000 barrels of diluted bitumen into low-sulphur diesel fuel. With an estimated $9.3-billion price tag, the facility will cost $119,200 per barrel.

It will be the first refinery built in Canada in three decades, which means there are few comparisons to evaluate the costs.

Pacific Future Energy has proposed a refinery near Kitimat, B.C., that would process 200,000 barrels of oilsands bitumen per day, more than double the Sturgeon plant’s capacity.

The B.C. project is expected to cost $12 billion to $14 billion, which breaks down to $60,000 to $70,000 per barrel, up to half the cost of the Alberta project.

Not sure how they figured out the price per barrel??? thats based on the plant running for one day... spread the cost over, say, 30 years and im sure the price per barrel to refine would be way more inline with a new efficient facility. maybe i am missing something.

30 x 365 days = 10950 days

78,000BPD x 10950 days = 854,100,000 barrels

$9,300,000,000 / 854,100,000 barrels= $10.88/barrels

maybe the refinery has a shorter life than 30 years, plus cost of maintanence and oeprating costs will drive that number up. but to say it will cost $119,200 per barrel is pretty bad wording. again, maybe i missed something here. someone can correct me to help me understand.

that being said, it makes me shake my head when huge companies get major subsities to build their projects. its not like they are going to lower the price of fuel becuase the taxpayer helped them out.

[Drewski Canuck]

Over 100 Million was invested and "in the ground" the first time this thing got shelved in 2007 - 2008.

By the way, TOTAL walked away from their "upgrader" in 2010 as the economics weren't there. They had spent millions as well.

This plant was built in the time where spending money did not matter. Then what do you do when all the major contractors keep wanting big money?

The Labour costs kept going up, as did all the suppliers.

This is a 50 year plant. Yes, if it is our money, we should have accountability.

We all know that nothing can be done about it, OTHER THAN CREATING POLITICAL FODDER FOR THE NEXT ELECTION!!!

(OK, now you know what the point of all the hoopla is.)

Drewski

[Big Grey Wolf]

A "value adding" project to create significant trades and engineering jobs, not ship raw bitumen at $20/bbl replace with $130/bbl diesel and naphtha to provide diluent for oilsands production. I can see why the Alberta Party cannot get any traction when they do not even know what drives the Alberta economy.
Just for record Syncrude Upgrader costs doubled and both Federal and Provincial governments had to bale the project out. Proved to be one of the best projects in Alberta.

[Deer Hunter]

There is the cost to the owners at $9.3 billion. Debt financed.
Then there is the cost to the users who are not owners (Alberta government) who have committed 37,500 bbl/d of bitumen royalty volumes for the next 30 years.
The fees as outlined in last years Alberta Annual report are as follows:

Under the processing agreement, the Commission is obligated to pay a monthly toll comprised of: senior
debt; operating; class A subordinated debt; equity; and incentive fees on 37,500 barrels per day of bitumen
(75% of the project’s feedstock) for 30 years. The toll includes flow through costs as well as costs related to
facility construction, estimated to be $8.5 billion. The Commission has very restricted rights to terminate the
agreement, and if it is terminated the Commission remains obligated to pay its share of the senior secured
debt component of the toll incurred to date. The term of the commitment begins upon the commencement of
commercial operations. No amounts have been paid under this agreement to date.
The nominal tolls under the processing agreement, assuming an $8.5 billion Facility Capital Cost, market
interest rates and 2% operating cost inflation rate, are estimated above. The total estimated tolls have been
reduced by $1.26 billion relative to March 2015, due primarily to lower debt tolls. As at March 31, 2016 NWRP
has issued $3.65 billion in bonds at lower than anticipated rates and expects future bond offerings to continue
this trend.
No value has been ascribed to the anticipated refining profits available to APMC over the term of the agreement.
(b) North West Redwater Partnership Monthly Toll Commitment
The Commission has used judgment to estimate the toll commitments. The components of the toll are:
senior debt; operating costs; class A subordinated debt; equity; and incentive fees. To calculate the toll,
management has used estimates for factors including future interest rates, operating costs, oil prices (WTI and
light/heavy differentials), refined product prices, gas prices and foreign exchange.
The future toll commitments are estimated to be:
2016-17 $ -
2017-18 $ 261,000
2018-19 $ 656,000
2019 -20 $ 763,000
2020-21 $ 904,000
Beyond March 2021 $ 22,166,000

At 37,500 bbls/d which is the committed govt royalty volumes
The fees to the user are
2017-18 $19.06/bbl
2018-19 $47.92/bbl
2019-20 $55.74/bbl
2020-21 $66.05/bbl
Beyond 2021 $62.26/bbl

The price of diesel is falling ($85/bbl currently without the extra supply from this refinery) and the costs to turn bitumen into diesel is escalating. Royalty oil volumes should have positive cashflow to the province. Yet these volumes could end up being a big expense to the province. And an expense to the province is revenue to the refinery owners.

They would have been better off just selling the raw bitumen at market. Rather than subjecting the taxpayer royalty volumes to this high priced refinery process.

"Value add" means adding value to a raw product. Not taking it away through a third party owned refinery. If the government owned the refinery fine. But they don't. The only value being added is to the owners of the refinery, at the expense of Albertans royalty volumes.

[whiteout]

Originally Posted by philintheblank

At full capacity, North West Refining’s Sturgeon plant would process 78,000 barrels of diluted bitumen into low-sulphur diesel fuel. With an estimated $9.3-billion price tag, the facility will cost $119,200 per barrel.

It will be the first refinery built in Canada in three decades, which means there are few comparisons to evaluate the costs.

Pacific Future Energy has proposed a refinery near Kitimat, B.C., that would process 200,000 barrels of oilsands bitumen per day, more than double the Sturgeon plant’s capacity.

The B.C. project is expected to cost $12 billion to $14 billion, which breaks down to $60,000 to $70,000 per barrel, up to half the cost of the Alberta project.

Not sure how they figured out the price per barrel??? thats based on the plant running for one day... spread the cost over, say, 30 years and im sure the price per barrel to refine would be way more inline with a new efficient facility. maybe i am missing something.

30 x 365 days = 10950 days

78,000BPD x 10950 days = 854,100,000 barrels

$9,300,000,000 / 854,100,000 barrels= $10.88/barrels

maybe the refinery has a shorter life than 30 years, plus cost of maintanence and oeprating costs will drive that number up. but to say it will cost $119,200 per barrel is pretty bad wording. again, maybe i missed something here. someone can correct me to help me understand.

that being said, it makes me shake my head when huge companies get major subsities to build their projects. its not like they are going to lower the price of fuel becuase the taxpayer helped them out.

They are talking about the cost to build the facility. It's simply the construction cost divided by the design capacity. It's a decent benchmark when you're comparing facilities and their construction cost.

[philintheblank]

Originally Posted by whiteout

They are talking about the cost to build the facility. It's simply the construction cost divided by the design capacity. It's a decent benchmark when you're comparing facilities and their construction cost.

Makes more sense when you put it that way. Thanks

[79ford]

Soooo, for dollar values sake, 31$ bitumin price, 47$ diluent price, 90$ diesel price

Selling the raw bitumin for 30 years

78 000x31x365days x 30 years= 26.474 billion dollars

Take into accout one quarter of the bitumin volume is purchased diluent just to ship the stuff so the effective value of bitumin to a company is bitumin price minus .25x current diluent price of 47$.

So the actual dollars into the economy is roughly 18 billion for the bitumin over the thirty years.


The diesel dollars

50 000 x 90$/bbl x 365 x 30yr = 49.27 billion

The diluent recovered and from processing

23 000 x 47$ x 365 x 30= 11.5 billion in diluent recovered and sold in alberta

Light ends, asphalt etc

5000bbl x 25$bbl x 365 x 30= 1.3 billion



Sooooo in total the plant will process and sell 62 billion dollars worth products at todays prices.

26 billion goes to feed stock, 36 billion will go to the project cost, and running the thing. If they profit 6 billion over the life of the prject at 200million per year. Then that leaves roughly 30$ per barrel to process.

Considering diluent recovery cost 7$ per barrel or less for 25% of the production, the 30-40 $ per barrel for diesel production is pretty managable .



When you consider most companies lose money selling bitmin at 30$ per barrel it is probably a wise idea to refine the stuff and make some 47$ diluent barrels or 90$ diesel barrels.

Also, a shorter shipping distance saving 2-4 bucks per barrel vs shipping to texas is a 10% shot to the bottom line for the bitumin producer just on the short pipe distance. Not toomention more local diluent in alberta means diluent costs are cheaper and more availible. Imperial oil has used gasoline to ship bitumin a few times because it was cheaper than diluent,lol ,


I dont see why people would rather ship 26 billion $ in bitumin and no jobs after the pipe vs have 62 billion worth of products manufactured from the bitumin and hundreds of six figure jobs and more diesel for our own economy.


The governent gets its money back by taxing that 62 billion dollar effort by employees, contractors and the company. The companies pay off their own debt to build the thing. Then as the population in alberta grows they tax the fuel on the sale end too and the retailer etc.

Mind you they tax the fuel anyways but it will be local fuel.

[79ford]

Even if the government and companies break even for 30 years there is an extra 36 billion dollars sloshing around the alberta economy over 30 years.... when you consider taxes as a portion of income going into an economy there is probably 8-10 billion in taxes for the government to collect on the 36 billion.


The government gets its money, this is the same reason they bail out pulp mills all the time. Better overall resource utilization and tax base of a period of 25-50 years is where the government looks.

[petew]

I hope the Auditor notices the huge costs of reworking the piping that was poorly fabricated in India . Lots of fabrication jobs were lost to India on this project, but the re-work to make it fit probably offset any job losses in Alberta.