Alberta’s New Sturgeon Refinery: High Risk for High Reward?

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Source: ZE

After eight years in the works, a sod-turning ceremony was held September 13, 2013 to celebrate the beginning of a new project that will result in a $5.7 billion refinery in Redwater, Alberta (about 50 km north of Edmonton) (The Globe and Mail). The Sturgeon Refinery is  the first large-scale refinery to be built in North America in almost 30 years (The Globe and Mail), even while the number of refineries in Canada has been in a slide from 40 to 19 since the 1970s (Huffington Post).

Refining is higher risk than upstream oil production, because profits depend directly on ever-changing global oil prices and the demand for refined products, which in this case is diesel fuel (Huffington Post). As the graph in Figure 1 below shows, Canadian crude oil has been trading for much less than the Western Texas Intermediate (WTI) crude oil, making it a better idea to refine the oil into diesel and sell it at a higher price.

Figure 1. The comparison of WCS Western Canadian Crude Oil and WTI Crude Oil shows that Canadian oil has been trading at a lower price. (Graph created using the ZEMA Suite, with NYMEX data, effective date September 18, 2013.)

The creation of the refinery is a collaborated effort between North West Upgrading Inc. and Canadian Natural Upgrading Limited, a wholly owned subsidiary of Canadian Natural Resources Limited. It will produce low-sulfur diesel fuel from bitumen (Newswire) and the diesel will have the “lowest embedded C02” in the world (Edmonton Journal). It is also the first refinery to trap and use C02 for enhanced oil recovery (EOR) at formerly depleted oil fields (Newswire & Edmonton Journal).

A Profitable Project

By 2016, the refinery could produce 50,000 barrels of low-sulfur diesel a day, eventually ramping up to 150,000 barrels a day (The Globe and Mail). Once all three phases are in full swing, the operation will bring in $10 billion per year in revenue (Edmonton Journal). Alberta is set to receive about $1 trillion in economic activity throughout the economic life of the project (Edmonton Journal).

North West Upgrading, the company leading the project, will receive $19 billion from the Alberta government in its 30-year deal for processing the bitumen into diesel (The Globe and Mail). The government has also agreed to cover North West Upgrading’s debt, if the plant were to cease operations for any reason (The Globe and Mail).

The Unknown Future of Diesel Demand

Demand for diesel fuel used to represent economic prosperity, since diesel-powered trucks keep busy in a booming economy, and do the opposite when the economy slows (The Globe and Mail). Diesel has become less representative of economic growth as fuel economy standards rise, more cargo is moved on economical trains, and more businesses convert to natural gas-powered trucks (The Globe and Mail). Since mid-2011, diesel demand has declined at a steady pace, and in January 2013 it was down 9% – though trucking activity had risen that month (The Globe and Mail). (To read about the positive side of diesel production, see our blog, Converting Waste Emissions Into Diesel: A Climate Change Solution.)

Nathan VanderKlippe, in his article, “Diesel divergence: Fuel demand falling as truck traffic surges”, writes, “The disparity [between the above facts on diesel usage and demand] may be a sign of the change sweeping the continent’s energy use, as governments and natural gas companies seek to reduce reliance on traditional fuels. It could also serve as an early warning sign to Alberta, which has committed future oil royalties to a diesel refinery.”

Ian MacGregor, Chairman of the North West Upgrading Board of Directors, however, seems confident about the future of diesel demand: “The world has evolved in a certain way, and it’s evolved to use diesel fuel. If that changes, it’s going to take a very long time” (The Globe and Mail).

One thing that we can be sure about is that the new refinery will have a positive impact on employment in Alberta, as over 1,000 people are currently working on the North West Redwater project, a number which will grow to 8,000 at its peak (Newswire). Opinions on the future of diesel demand vary, and it will certainly be interesting to see what the future holds.

To learn how the changing oil landscape – and its corresponding impact on market data and projections – can affect your business decisions, contact us for a free demonstration of our enterprise data management, analysis, and integration software, the ZEMA Suite.

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