Alberta Downstream: The Case of Sturgeon Refinery

The Project developer, North West Redwater Partnership, was established in February 2011 through a joint venture between North West Upgrading and Canadian Natural Resources Limited (CNRL), with the intent of building and operating Canada’s first refinery in three decades. The Project targets to process 150,000 barrel-per-day of bitumen over 3 phases. Feedstock for Phase 1 (50,000 barrel-per-day) will be provided by CNRL and by the Government of Alberta through its bitumen royalty-in-kind initiative under a 30 year cost of service toll contract.
 
Summary of Economic Analysis

With current low crude prices and resulting surplus of oil patch labor, Phase 1 construction is likely to be completed by September 2017 as planned. Upon completion of Phase 1, the Project is expected to output 40,250 barrel-per-day of Ultra-Light Sulphur Diesel (ULSD); 28,270 barrel-per-day of diluent; 8,790 barrel-per-day of low Sulphur Vacuum Gas Oil; and 3,370 barrel-per-day of Liquefied Petroleum Gas, in addition to 3,500 tonnes-per-day of pure CO₂ stream for installed Carbon Capture & Storage technology.
 
The Project seems to answer some market fundamentals: (A) it boosts current refining capacity of ULSD in Western Canada from 250 barrel-per-day to 290 barrel-per-day, hence, closing 60% of the demand gap at 2017 (using the 20-year average demand growth rate); and (B) the 12-month, 2013 average price of diesel as a percentage of West Texas Intermediate is 127%, creating a handsome differential of 46% when compared the corresponding price of diluted bitumen. Economic risk is represented by the squeezed heavy/light spread of C$13.55/bbl as of April 16^th, 2015. A sustained heavy-light spread of at least $25 per barrel is required for economic operation of the Project.
 
Summary of Political Analysis

Despite some of the economic inefficiencies, the decision for sustained support to the Project by its proponents seems to be politically motivated, as evident by the re-commitment of the Province of an additional $7 billion (up to $26 billion) over the Project’s lifetime upon a ~50% hike in capital cost (grossing at $8.5 billion).
 
The Province argues that, in addition to creating value on Albertan soil before shipping abroad, the Project would also clear 78,000 barrel-per-day of diluent off its existing pipeline infrastructure, paving the way for improved royalty collection from the excess capacity provided to producers. The Wildrose Party; Alberta’s Official Opposition, has accused the government of engaging the Project proponents in “corporate welfare”, and that is before the controversial Opposition MLAs floor crossing last December. No other voices of dissent from major political parties or unions in Alberta have been reported.
 
As history was made last Tuesday in Albertan politics, the Project is not expected to conflict with the newly elected New Democratic Party-majority Government. Au contraire, the Party’s leader, Rachel Notley, has announced its Party’s intent to promote upgrading and refining jobs in Alberta, and reward businesses that add value to the resources before they cross borders.
 
Environmental Outlook

According to a cost-benefit analysis study conducted by the Canadian Energy Research Institute in Calgary, the Sturgeon refinery project has the potential to be a net cost, economically speaking, when including a number of environmental costs such as potential greenhouse gas damage costs from final consumption emissions, water pollution, opportunity cost of water consumption, and potential human health impacts. Depending on the chosen discount rate, the study states that environmental costs of greenhouse gases could be in a range of $359 million to $3.9 billion when the project is fully operational. Criteria air contaminants further contribute over $90 million in overall pollution costs.
 
Conclusion