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Ian McGregor, chairman of North West Upgrading, one of the backers of Alberta’s planned Sturgeon oil refinery: ‘Why can’t this be the refining capital of the world?’

Chris Bolin/The Globe and Mail

Ian MacGregor has grown accustomed to the outsized nature of his ambitions. To build the oil refinery he has pursued for years, he will need $5.7-billion. He will need 20 million hours of work. He will need to overcome history: North America has not seen the construction of a major new refinery since 1984.

But building the Sturgeon refinery is, in some ways, the easiest task Mr. MacGregor has before him. He has a plot of land northeast of Edmonton. He has 1,350 people working to design and engineer a plant that will, in the first of three similar-sized phases, convert 50,000 barrels a day of oil-sands bitumen into diesel and other products.

The tougher task is waiting, for years, to find out whether he is right in gambling that Canada can make more profit by doing something with its energy rather than merely shipping it away.

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While Sturgeon is using a method of financing that offloads much of its risk onto the Province of Alberta, the refinery project is still, in many ways, audacious. It is a new refinery at a time refineries have fallen from favour. It is a major new industrial development in a province where others are slowing their pace amid cost concerns. It won't even produce gasoline, the main product from most refineries.

It is, instead, a diesel refinery, specifically being built to cater to a province that consumes more diesel than gasoline – and promises new revenues for a government that stands to become a major oil company all on its own, through energy royalties that it collects as physical barrels.

Sturgeon is 50-50 owned by Canadian Natural Resources Ltd. and privately held North West Upgrading Inc. But the province has pledged three-quarters of the oil it will need (the remainder coming from CNRL), making Alberta a critical stakeholder.

It could also be the biggest beneficiary: Refining is adding so much value to cheap Canadian crude today that if Sturgeon were running right now, the province would see $600-million a year in additional profit from its oil.

That is the key selling point for Mr. MacGregor, the chairman of North West – that Canada can compete with other jurisdictions on the manufacture of refined products, and can make money doing so. Even if it costs more to build here, "in the 50-year life of these things, these are cents per litre we're talking about in the end," he says. And, he adds, "every one of these things essentially multiplies the value of the raw material by two to 2.5 times, essentially. All that value stays in Canada – it's all taxes, wages, schools, hospitals."

That is, if he can make it work.

In Canada, 38 refineries operated in 1981. Today, there are 15; eight have ceased operation since 2009. Those numbers mask a broader reality. Remaining refiners have gotten larger, and from 1985 to 2011, Canada saw 53-per-cent overall growth in refining capacity.

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Yet, in recent years, Alberta's energy industry has largely abandoned the processing of crude. Imperial Oil Ltd. built its $10.9-billion Kearl mine without an upgrader that, much like a refinery, transforms heavy oil sands bitumen into lighter oil, an Alberta first. Others have similarly abandoned upgrading plans, saying it's not sufficiently profitable.

As for Sturgeon, "the economics are tough," says Steve Fekete, managing director of downstream energy consulting with IHS. The reason it could produce extra profit for Alberta today is that Canadian oil is selling at a severe discount. But that discount may not last. Construction should begin on Sturgeon next year; it will take three years to build. By that time, the discounts could be gone.

At the same time, demand for refined products is diminishing while the continent experiences a glut. In the United States, roughly 15 per cent of refined products are now exported, up from roughly 5 per cent a decade ago, according to Roger Ihne, a Houston-based refining market specialist at Deloitte. Exports are key – and Sturgeon is in a province that already produces more diesel than it needs, and is far from export markets.

Still, Mr. MacGregor says Sturgeon will produce a high-quality fuel that can be shipped far away and still be profitable. He believes diesel is a more palatable option for exports to Asia because in a spill, it is more likely to evaporate than crude.

He also intends to do things differently. For construction, he is breaking the 20-million hours of labour into more manageable 1,000 and 2,000-hour packages. He plans use smaller construction modules that can be built in Mexico or eastern Canada.

Mr. MacGregor is using a very different financing model. Sturgeon will charge a fee to process oil, unlike other refineries that buy crude and then take the profit from selling gasoline and diesel. That gives Sturgeon an assured revenue stream, a fact that has been criticized as a corporate giveaway in Alberta. Sturgeon will accept construction price risk. But much of the operational risk – how much profit comes from making bitumen into diesel – will be held by the province. Banks backing Sturgeon like that – so much so that Mr. MacGregor figures his cost of capital is half that of traditional refineries. Sturgeon is, he says, "unique."

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But in some ways, Mr. MacGregor hopes it doesn't stay that way. This is his biggest gamble of all: Even as he builds a new refinery, he is in some ways betting, or at least hoping, he won't be the last.

"Why can't this be the refining capital of the world?" he says of Alberta. "Why is refining this black box that we can't do here? There's no reason. We have the resources here. We have the intellect. We have the people that want to work."

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