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Buses bring in the morning shift of workers to Syncrude’s facility at Mildred Lake, 30 kilometres north of Fort McMurray, which upgrades bitumen into 300,000 barrels a day of sweet crude (it has a total capacity of 350,000)

Ian Willms/for Report On Business magazine

Canada has staked its future on the oil sands. In November, Report on Business magazine together with Thomson Reuters examine what that means both at home and abroad. Read more from the issue at tgam.ca/oil.

At the groundbreaking ceremony in September, 2013, for a massive new bitumen refinery in Sturgeon County, just north of Edmonton, North West Upgrading Inc. CEO Ian MacGregor got a little choked up—and carried away. "It's just such an enormous opportunity," he said to a television reporter. "I think it dwarfs the CPR, really."

That's a stretch, but maybe not a huge one. The Canadian Pacific Railway, completed in 1885, fulfilled Sir John A. Macdonald's national dream of building a transcontinental railroad. The first phase of the Sturgeon Refinery is scheduled to begin transforming 50,000 barrels a day of molasses-like bitumen into diesel fuel in 2017. The goal is to eventually triple that to 150,000 barrels a day. If not a national dream, the refinery at least addresses a long-standing anxiety in Alberta—that the province exports too much of its natural resources in raw form, and could capture more jobs and profits by processing them first.

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Like Canadian Pacific's historic line, the road to building the refinery has been long and complicated, and has required hefty dollops of government financial assistance. In 2005, privately owned North West raised its first $38 million in equity for what was then budgeted as a $1.5-billion project. It was aiming to begin production in 2010.

But the fallout from the 2008-2009 recession stalled the plant, and North West struggled to raise more money. In 2009, to help bitumen producers and to kick-start upgrading and refining projects, then-premier Ed Stelmach's government began accepting provincial royalty payments on bitumen in kind, rather than cash.

The Sturgeon Refinery soon got two more big boosts. In 2010, North West announced that it was forming a 50-50 joint venture with Canadian Natural Resources Ltd. to build and run the facility. The following year, the province said it would supply 37,500 barrels a day of its bitumen to the refinery and pay fees for processing. It would then collect cash by selling the finished product.

But costs continued to climb as Alberta's oil sector heated up. By the time construction began in September, 2013, the projected price tag had already reached $5.7 billion. Last December, the total shot up to $8.5 billion, and the province and Canadian Natural agreed to provide $300 million each in loans.

The first phase of the refinery is scheduled to open in September, 2017. Up to 5,000 workers will be needed at peak construction times, and 500 employees will be hired at the plant.

Yet the refinery is still only a small step toward the dream of creating a big bitumen processing sector in Alberta. Last year, Canada exported about 1.2 million barrels of bitumen a day—about 60% of daily oil sands production—to the United States. The refinery will produce mostly diesel, not a wide range of refined products, such as gasoline and heating oil.

The trouble is that refining is a tough business in North America. The last major oil refinery built in the United States was in 1976, and in Canada, in 1984. The industry has a history of thin profit margins and high capital costs. Inefficient plants have closed. And three other bitumen upgraders proposed for Alberta by major producers have been shelved over the past six years.

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Exporting the finished product even to the United States, let alone Asia, is also still a challenge. Most of the Sturgeon Refinery's diesel will be sold in Western Canada. "You have to be a dreamer to do these things," MacGregor says in an interview. "Sometimes, it's a long time in the wilderness."

Undaunted, two dreamers in British Columbia are promoting even more massive bitumen refineries. In 2012, newspaper publisher David Black said that there were massive potential markets for refined fuel in Asia. He proposed building a plant in Kitimat, in northwestern B.C., that originally carried a price tag of $13 billion.

The estimated total cost of Black's so-called Kitimat Clean Ltd. project is now $32 billion: $8 billion for a pipeline to get the bitumen from Alberta to Kitimat, $21 billion for the refinery itself, and $3 billion for a tanker fleet and other infrastructure. He now figures the project could begin production as early as 2022, employ 3,000 people and refine up to 550,000 barrels a day.

The "clean" label is partly meant to allay fears about possible oil spills into coastal waters. Black argues that diesel and other refined products would be easier to clean up than heavy raw bitumen. "Canada has to get its resources to market somehow. What I'm proposing is the best for Canada and B.C. because there will be huge value added," he says.

But the economics also appear to be stacked against Black. Asian refineries have cheaper labour and lower capital costs. He hasn't signed any major investors, either. He wants Ottawa to provide billions in federal loan guarantees.

In June, a company called Pacific Future Energy unveiled a bold plan to build "the world's greenest refinery" somewhere on B.C.'s coast, probably near Prince Rupert. The refinery would be built in stages that would each process up to 200,000 barrels of bitumen a day. The first stage alone would cost $10 billion.

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The firm also vows to work in "full partnership" with First Nations. "What we have in B.C., rightly or wrongly, is very significant opposition to the thought of bitumen being on tankers and shipped," says Stockwell Day, a former federal international trade minister who serves as special adviser for Pacific Future Energy.

But Art Sterritt, executive director of the Coastal First Nations, says that aboriginal groups don't want bitumen to flow through pipelines across British Columbia in the first place.

For the moment, both First Nations and the provincial Liberal government are devoting more attention to proposals for natural gas pipelines and export terminals for liquefied natural gas. Seventeen B.C. LNG projects have been proposed. The government would like to see three facilities up and running by 2020. LNG is seen as a commodity with manageable and acceptable environmental risks.

Some oil dreams do become a reality, but for many key constituencies, the prospect of processing bitumen is still a nightmare.

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