Canada’s first new refinery in decades breaks ground

A project eight years in the making, Canada's newest refining facility will be marked with an official ceremony Friday celebrating the ground-breaking just north of Edmonton in Alberta's industrial heartland.

North America has not seen the construction of a major new refinery for almost three decades, and the $5.7-billion Sturgeon project brought forward by North West Upgrading Inc. is a rare example of new refining capacity on the continent.

The diesel-producing refinery will be particularly significant for Canadian Natural Resources Ltd. (CNRL) and the Alberta government. Under a special arrangement, they hold a stake in the operation, will supply oil sands crude to it, and participate in its profits. As a result, the Redwater, Alta. refinery will allow them to both avoid the difficulty of transporting bitumen from Alberta's oil sands to market, and the price discount – referred to as the differential – on Western Canada's heavy oil. Instead, both CNRL and the government hope to make their profits from the finished diesel product.

"It's more viable now than it ever has been," said North West Upgrading chairman Ian MacGregor. His dedication to the project extends to having a special caboose attached to the train that will carry the heavy building components from Duluth, Minn. to the refinery site this winter so he can ride along.

Mr. MacGregor said another benefit of refining in Alberta is that it doesn't require another crude-oil pipeline, which could run into the same opposition currently affecting Keystone XL and other planned projects. "We're kind of realizing it's not going to be so easy to build pipelines to other places."

At the refinery site, underground utilities are already being installed, and Mr. MacGregor said 3,000 people will be employed on site once construction fully ramps up. The first 50,000 barrels per day phase of the project is scheduled to be up and running by late 2016. Eventually, the facility will process 150,000 barrels of bitumen per day into low sulphur diesel. He is still working to finalize billions of dollars of financing.

Alberta Premier Alison Redford is also scheduled to appear and make remarks at the ground-breaking Friday, and her presence there is far more than a regular political appearance at a private sector event. Mr. MacGregor said the project would have never got off the ground without Alberta government involvement.

The Alberta government has struck a 30-year deal with North West Upgrading that will see that province pay the company more than $19-billion in tolls to process bitumen owned by the Alberta government. In a move that has attracted questions from Alberta's opposition parties, the deal also dictates that if the plant stopped operating for any reason, the government would still be on the hook for North West Upgrading's outstanding debt.

But Alberta Energy spokesman Bart Johnson said this is a way of putting oil royalties paid in-kind to better use. Right now, conventional oil royalties are paid out almost entirely in-kind, he said, and bitumen royalties are paid in cash. But the province is moving to a system of collecting some or all of its bitumen royalties in-kind in order to use the raw product to encourage upgrading, refining and petrochemical development in Alberta.

The government also said provincial coffers will benefit materially from the policy, and if the Sturgeon refinery was already in place processing government bitumen in kind, the result would be an additional $500-million in provincial revenues this year.

"Of course it's a risk. But it's a risk that the Crown has calculated to be actually an opportunity," Mr. Johnson said.

Both the Alberta government and Mr. MacGregor call the Sturgeon facility a refinery instead an upgrader – a term associated with a more basic level of oil processing. Mr. MacGregor said the quality and quantity of diesel that will be produced by his facility is greater than that seen in an upgrader.

However, the Sturgeon facility won't produce the range of products – including gasoline – normally associated with the conventional definition of a refinery, according to Michael Ervin, a petroleum industry consultant for Kent Marketing Services Ltd.

And while Mr. MacGregor is confident that Western Canada's demand for diesel alone will eat up his refinery's output in the first phase, Mr. Ervin said North American's future demand for diesel remains uncertain. He said diesel demand might be tempered as natural gas prices stay low, and more industrial fleets of trucks, and other users, switch to the lower emission fuel.

"There are a number of factors that in general speak against the idea of an expansion of refinery capacity in North America," he said.