The Alberta government is directing a chunk of the province's oil sands production to a proposed $5-billion upgrader, giving the long-awaited project the capacity necessary to ignite construction plans.
Alberta on Wednesday said it will supply the proposed upgrader with 37,500 barrels of bitumen per day, provided by production royalties the government will collect from oil sands companies. The upgrader is a joint venture between North West Upgrading Inc., a private company, and Canadian Natural Resources Ltd., which will send 12,500 barrels of bitumen per day to the facility.
The project, if successful, fulfills two of Alberta's energy goals: It gives the government control over a share of its take of bitumen, which it believes will lead to increased revenue for the province and create jobs. And it ensures a supply of carbon dioxide for a proposed pipeline designed to shuttle the pollutant to existing, but depleting, oil fields so that it can be used to extract more oil, again jacking up royalty payments.
Alberta currently has a handful of upgraders, which treat tar-like oil sands bitumen into crude that is then shipped to refineries to be made into fuel and other products. The planned North West upgrader goes an extra step, refining the bitumen and producing diesel fuel.
The upgrader plan will provide a boost to its future home, the so-called Industrial Heartland about 45 kilometres away from Edmonton, where energy and petrochemical companies cancelled or stalled a number of projects when oil prices crashed a couple years ago and the economic slowdown crimped spending.
"We're moving ahead," North West chairman Ian MacGregor said. The next step is to do detailed engineering work, followed by formally deciding whether to proceed, which he expects to come in the next few months.
"The facility's [capacity]is full now," Mr. MacGregor said. The upgrader is designed to process 50,000 barrels of bitumen per day beginning in the middle of 2014.
While the deal allows the upgrader to proceed, creating jobs and producing diesel in a province often pinched for the fuel when farmers fire up their machinery during harvest, it does put the amount of money the province receives from oil sands activity at risk. Right now, the government takes all of its oil sands royalty payments in cash. However, when it opts to take part of the payments in the form of bitumen - dubbed the bitumen royalty-in-kind program - the cash it ultimately receives will depend on the money it makes off the diesel fuel produced by the upgrader.
Alberta Energy Minister Ron Liepert said in an interview the deal will only be "marginally" more profitable for the government than taking cash payments for royalties. TD Securities Inc. advised the province, and its forecasts stretched for decades, he said.
However, the province considered other factors that private companies would not otherwise take into account. At the height of the upgrader's construction, for example, roughly 8,000 people would be employed. About 600 engineers will soon be hired to start planning, and between 500 and 600 jobs exist when the upgrader is operating. Increased access to diesel also played a role.
The upgrading partnership will charge the province and CNRL lower fees to process their bitumen than competing facilities, Mr. MacGregor said. The partnership will also market the province's share of the diesel it produces.
"The fee is low relative to other fees because of the quality of the [customers we're]contracting with," Mr. MacGregor said. "There isn't much risk that the government isn't going to pay their fee or that the government isn't going to have enough bitumen." The same holds true for CNRL, he said.
The agreement lasts for 30 years and the province can extend it for another decade, a deal the province would be "crazy" not to take, Mr. Liepert said. The two sides also have an agreement in principle to expand the upgrading facility by 50,000 barrels per day, with a price tag of another $5-billion. While the province and upgrading partnership have not struck a binding agreement, the proposed deal would fulfill roughly three-quarters of the expansion's capacity, Mr. MacGregor said. There are also plans for a third round of expansion, again of the same size and price, but its capacity is "wide open," he said.
Réal Cusson, CNRL's senior vice-president responsible for marketing, said the province's involvement should make it easier to finance the project, which will cost $15-billion if all three phases are built. With the government as the upgrader's primary customer, lenders may also hand over cash at a better rate, he said.
The first phase of this upgrader will produce more than 5.5 million litres per day of ultra-low sulphur diesel and capture about 3,000 tonnes of carbon dioxide per day, the government said. Enhance Energy Inc.'s proposed Alberta Carbon Trunk Line will buy much of the carbon dioxide produced. Enhance plans to ship the CO2 to conventional oil fields so it can be used for enhanced oil recovery, pushing more oil to the surface while capturing CO2 underground. Its construction will also create jobs and when more oil is extracted, the province's royalties will increase, the government expects.