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Gas burns from a flare stack at an oil refinery in this file photo.Andrew Vaughan/The Canadian Press

An Alberta refinery project touted as Canada's first in decades will be delayed by more than a year and will see its costs shoot up to $8.5 billion – a jump of almost 50 per cent compared with the earlier estimate of $5.7 billion.

The Sturgeon Refinery project is part of the Alberta government's push to see more oil processed on Canadian soil, and to increase the value of bitumen produced in the province's oil sands – which sells for a discount in key United States markets.

But the costs for that policy push are increasing. With major stakes in the project, both oil giant Canadian Natural Resources Ltd. (CNRL) and the government of Alberta have reached an agreement in principle to each provide a $300 million loan, with interest, to help the North West Redwater Partnership to keep the bitumen-to-diesel project afloat. The rest will come through loans from financial institutions. Both CNRL and the government have also agreed to further loans in the "unlikely" event that more funds are required to complete the project, according to a shareholder update.

Costs went up due to "a combination of cost inflation and the inability to fully capture certain cost savings initiatives," according to a news release. Work on the project to be located 45 kilometres northeast of Edmonton has already begun, but the news release also said the start-up of commercial operations targeted for mid-2016 has been moved to September 2017.

Alberta Energy Minister Ken Hughes said Wednesday the Sturgeon project is still a good deal for Albertans, and it will ensure better returns on the bitumen-in-kind the government receives in lieu of royalties.

"We know that by providing financial support to the Sturgeon Refinery we will be able to strengthen our economy by creating thousands of jobs and generating millions in tax revenue," Mr. Hughes said in an e-mail.

"It will also allow us to boost our reputation as a responsible energy supplier and get more badly needed diesel fuel into the western Canadian market."

While the debt is outstanding, the Alberta Petroleum and Marketing Commission – the Crown corporation responsible for selling province-owned conventional crude and bitumen – will hold a 25 per cent voting right on certain elements of the refinery's construction and operation.

Under a special arrangement, both CNRL and the Alberta government hold a stake in the 50,000 barrels-per-day refinery. They will both supply oil sands crude to the operation, and participate in its profits. The project allows both CNRL and the government to 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.

In September, the Alberta government said it had struck a 30-year deal with the project operator, North West Upgrading Inc., that will see that province pay the company billions in tolls to process bitumen owned by the Alberta government. 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.

Earlier this year, North West Upgrading chairman Ian MacGregor said the refinery project would have never got off the ground without Alberta government involvement.

On Wednesday, Wildrose party finance critic Rob Anderson he wants to see more bitumen processing in Alberta. But he said when a project is only viable because a government participates, "then that should be a huge red flag for people."

Also on Wednesday, Federal NDP Leader Thomas Mulcair said his party would work with the provinces to upgrade and refine raw resources, such as bitumen from the oil sands, in Canada.

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