The chief executive of the company building the first phase of an oilsands upgrader and refinery northeast of Edmonton says the election of an NDP government in Alberta likely paves the way for the next two phases of the project to go ahead.

“I think the environment is better now [for the next two phases],” Ian MacGregor, president, chief executive and chairman of the board of Calgary-based North West Upgrading Inc. (NWU), said in an interview. “I have not talked to anyone in the government yet, but I believe we’re aligned [with] the same objectives.”

During the recent provincial election campaign, the NDP pledged to rebalance the tax and royalty system to reward resource processing in Alberta and reduce what it described as the province’s over-dependence on raw bitumen exports. Party leader and now Premier-elect Rachel Notley argued that shipping raw bitumen to existing upgraders in the United States robbed the province of the value-added jobs upgraders and refineries bring with them.

Former NDP leader Brian Mason, who is expected to play a key role in the new government, said that upgrading and refining should be linked to companies obtaining oilsands leases.

AFL support

The Alberta Federation of Labour (AFL), which backs the NDP, also argues that upgrading within Alberta should be strongly promoted by government.

Last October it released a study, Upgrading Our Future: The Economics of In-Province Upgrading, which argued that, even without government subsidies, an upgrader would produce a rate of return of 19 to 22.6 per cent with oil prices of between $80 and $120 a bbl WTI (DOB, Oct. 7, 2014).

The study’s author, Ed Osterwald, a senior partner with United Kingdom-based Competition Economists Group (CEG), has since updated his assumptions, based on lower crude prices.

The economics “become pretty marginal, to essentially uneconomic” at WTI prices below $50 a bbl, he recently wrote to the AFL.

However, Osterwald also wrote that, based on the current oil and gas industry downtown, construction costs could decline by 20 per cent to 30 per cent, meaning “there is a good possibility that an oilsands upgrading project may actually still be viable.”

MacGregor said the NWU upgrader, being built in Sturgeon County, northeast of Edmonton, will definitely be profitable and his company, a partnership that includes 50 per cent owner Canadian Natural Resources Limited (CNRL), is ready to build all three phases, which would ultimately upgrade 237,000 bbls of bitumen per day.

“I came to build all three phases,” said MacGregor, an engineer with over 30 years of energy related business creation and development experience, including oilfield engineering and construction company Abax Energy Services and White Pass Capital Inc., a private investment and advisory firm.

Morton critique

Although construction costs for the project, now about 25 per cent complete, ballooned to $8.5 billion when construction started last year from an estimated cost of $5.7 billion when it was announced in 2012, MacGregor said recent criticisms of the project by Ted Morton, former provincial finance and energy minister, “are based on errors in arithmetic.”

Morton, now with the University of Calgary’s School of Public Policy, maintained that the project was a questionable investment when construction costs were lower and oil prices higher and the government is “on the hook” for as much as $26 billion in bitumen processing payments (DOB, April 15, 2015). “Falling oil prices are further undermining the prospects for the investment to break even,” Morton told the Daily Oil Bulletin after his report was released in mid-April. He added that the project has “morphed into a multibillion-dollar boondoggle with high risks for Alberta taxpayers.”

According to Morton, the Conservative government’s original bitumen royalty-in-kind (BRIK) program in which the government would collect bitumen in lieu of royalties and then sell it to encourage upgrading in Alberta has been compromised and turned into an ongoing subsidy for the NWU.

He argued that under a new “take or pay” arrangement the government has assumed liabilities that could grow to $19 billion over the 30-year contract with NWU.

Morton findings challenged

MacGregor said Morton’s paper was wrong in a number of areas.

To begin with, its calculations were based on processing the wrong volumes of raw bitumen, which led to a miscalculation of the processing fee.

Morton’s paper determined the costs per bbl based on 50,000 bbls per day of raw bitumen, when, in fact, the plant will process about 79,000 bbls daily, said MacGregor. By using the wrong feedstock quantity the paper overstated processing fees by 55 per cent.

The paper also confused future inflation costs with current costs.

As a result, the Morton paper estimated processing costs would be $63 a bbl or higher while, in fact, in today’s dollars they are less than $35 per bbl for the diluted bitumen processed.

If the North West Upgrader, expected to go into operation in the fall of 2017, had already been in operation in the last year — even at low oil prices — the government would have made a profit on its investment in the plant, which comes through a cost-of-service fee it will pay to NWU (75 per cent of the volumes to be processed, with CNRL paying 25 per cent), said MacGregor.

“Even at the low prices of the last few months the government would have made $150 million,” he said. “If it had been in operation when they [oil prices] were higher they would have made $200 million.”

Furthermore, he said, those profits will increase in the future as NWU pays off the debt it has had to raise to build the project.

“Every year we’re paying off three per cent of the debt and the processing fee goes down.”

MacGregor pointed out that CNRL, a company known as an astute investor, continues to be committed to the project, suggesting it makes economic sense.

“Murray (Edwards, CNRL’s chairman) is famous for doing the math,” he joked.

MacGregor said the tolling approach being taken to help finance the project and pay off its debt is a standard formula used widely in the energy industry, particularly by pipeline and midstream companies.

He believes that even if former Conservative Premier Jim Prentice had won re-election the next two phases of the NWU project, which will be of equal size, would have had a good chance of going ahead.

“I think Prentice was a conservative guy, but he said they [the government] would live up to the contracts [with NWU],” he said.

Project expansion prospects

But now that the NDP has been elected MacGregor said the prospects for the project to expand are very good.

“I think it’s clear that Premier-elect Notley understands the refining business,” he said. “I’m convinced Albertans were right [in electing her and her party]. We have a smart leader. The sky isn’t falling.”

In fact, echoing what Notley herself has said, likening the election of the NDP to the election of a reform-minded and progressive government under former Conservative Premier Peter Lougheed in the 1970s, he said he believes the same kind of change is afoot in the province.

MacGregor went on to point out that the NWU is actually more of a refinery than an upgrader.

“We’re engineers [the original planners of the project] and we misnamed it,” he said.

That’s also a flaw in Morton’s analysis, as well as on the part of other critics of the project, MacGregor said.

“More than an upgrader”

He said it needs to be understood that the company really isn’t building just an upgrader, deploying conventional coking technology to convert Alberta bitumen into lighter crude ready to be refined into gasoline, lubricants and other petroleum products.

Instead the plant will produce 40,000 bbls daily of diesel from each phase. Diesel is an industrial fuel that is in high demand in Western Canada, the U.S. and worldwide.

“All the developing world runs on diesel.”

While oilsands producers might continue to have difficulty transporting their bitumen to the West Coast, for export from there, “diesel is going there now” and exports can grow without huge export barriers coming in the way, said MacGregor.

The other aspect of the design that gives it an economic advantage, as well as appealing to a new NDP government concerned about Alberta’s environmental image, is that it will use gasification technology, rather than the more conventional hydrocracking approach.

Environmental/EOR benefits

The advantage of that approach is that the refinery/upgrader won’t need to rely on natural gas as a source of hydrogen for the process. Instead of producing dry coke as a byproduct, North West will transform hot liquid bottom ends into hydrogen, oxygen and pure carbon dioxide (CO2).

“It produces 99.5 per cent pure CO2,” he said.

Most CO2 from conventional upgraders is mixed with nitrogen and other elements, rendering it unsuitable for enhanced oil recovery (EOR).

But the CO2 produced by NWU will have a market potential worth billions of dollars, by unlocking crude from pools in central Alberta, while allowing the CO2 to be sequestered in the process.

The CO2 will be sold to Enhance Energy Inc., which is developing a complementary project (MacGregor is a chairman of its board) that will include the 240-kilometre, 16-inch diameter Alberta Carbon Trunk Line. The line will eventually transport CO2 from the Agrium Inc. fertilizer plant near Redwater and from North West to be used in EOR in oil reservoirs in central Alberta.

Enhance has received a commitment of $495 million from the Alberta government’s $2-billion CCS (carbon capture and sequestration) fund for the project, expected to cost more than $1.3 billion. (The NDP, though, in its platform promised to cancel the CCS fund and reinvest the 2015/16 component into construction of public transit.)

The first phase of the refinery will spit out 1.5 million tonnes a year of CO2, which will not be released into the atmosphere, thanks to the integration with the CO2pipeline and EOR.

“That’s equivalent to [removing emissions from] 300,000 cars,” he said.

Furthermore, there are huge oil reserves of light crude oil that are otherwise being left in the ground.

“We think there’s one billion barrels [that can be produced by using EOR] in central Alberta,” said MacGregor.

Another important aspect of the gasifier-based technology North West will deploy is that in addition to producing ultra-low-sulphur diesel it will produce significant volumes of diluent, used in the oilsands industry to prepare bitumen for pipelining, along with ethane, a key petrochemical feedstock, as well as naphtha, butane and propane, all petrochemical feedstock.

He said the fact that the NWU “will be the cleanest refinery in the world” should appeal to the newly-elected government. In addition, the related CO2 pipeline and plans for EOR that will unlock otherwise trapped oil reserves are projects that should help improve Alberta’s image as an energy producer.

“I believe we’re aligned with the same objectives [as the new government],” said MacGregor.