Following shortly after Finance Minister Toews’ release of the 2020-21 financial provincial accounts, on 5 July Energy Minister Sonya Savage seemed delighted to announce “a better deal on the Sturgeon Refinery… reducing risk and saving an estimated $2 billion.” While the long-suffering Finance Minister had to offer a positive spin on a falling $17-billion deficit, Savage described the $2 billion “optimization” of the contract.
Background
As Abpolecon.ca reported last November, the Alberta Petroleum Marketing Commission (APMC) was the government agent tasked with achieving the best deal for taxpayers when the saga of the Northwest or Sturgeon Refinery. In last year’s financial accounts, a provision against the government’s economic interest in the refinery was taken of approximately $2-billion. In this year’s accounts, the APMC took the direct hit for the Keystone XL $1.3-billion provision which will continue to be litigated at public expense. Yet another $500-million was taken this year on the Sturgeon Refinery’s opera
tions.
Prior to the restructuring, the refinery was owned and operated by North West Redwater Partnership, which was owned equally by North West Refining Inc. and a subsidiary of Canadian Natural Resources Ltd (CNRL). The refinery is designed to process about 79,000 barrels of diluted bitumen into higher value products like “low sulphur” diesel, vacuum gas oil, diluent and natural gas liquids. The project has been dogged by cost overruns, long construction delays, an undercapitalized operator, and difficulties reaching full operational capacity until June 2020. APMC, on behalf of the Alberta Crown, is responsible for supplying 75 per cent of the facility’s feedstock and managing a 30-year processing agreement. The refinery boasts a carbon capture feature.
“Optimization”
The chief elements of the deal involve the following:
- Transfer to the Government a 50-per cent ownership interest held by North West Refining at a taxpayers’ cost of $425-million- although the initial news release provided no details of what the Government was paying.
- “This plan improves the government’s net present value for the refinery by approximately $2 billion over the life of the project. Net present value is the difference between present value of cash inflows and the present value of cash outflows over a period of time.” (No details on the change in the discount t rate were provided. More on this below.)
- “The plan also frees up $1 billion in cash flow to the government over the next five years. The additional cash flow is a result of the restructuring.”
- The processing agreement in extended 10 years to 2058.
Benefits
Besides the $2-billion purported financial benefits, the release championed other less concrete benefits.
- a simplified governance structure for the refinery.
- the government has an equal vote in the control of the refinery to which it is the majority toll payer.
- Canadian Natural will provide operational leadership to North West Redwater Partnership.
- Canadian Natural will help maximize efficiency and production capacity for the benefit of the entire value chain.
- enables greater government returns in the project’s upside.
- frees up $1 billion in cash flow to the government over the next five years. The additional cash flow is a result of the restructuring.
Some Questions
“We essentially now just handed hundreds of millions of dollars to someone who has cost us billions of dollars.” Professor Andrew Leach
According to The Globe and Mail’s Emma Graney at the technical briefing by officials on the financial restructuring, the Government revealed it was not only paying $425-million to North West Refining in exchange for its 50 per cent equity stake but another $400-million to CNRL. It is unclear why the Government should pay anything to NWR given its hapless management of the facility. According to Graney, the $825-million will be repaid back to the partnership over 27 years with the province responsible for 75 per cent of the payment instead of an original $1.02 billion over that period.
One of the critical questions is why did the government choose to extend its 30-year commitment for another ten-years to 2058? By 2058, given current climate change scenarios and investor resistance to supporting bitumen production, the facility will be lucky to be operating, let alone in 2040.
Another benefit touted by the Minister is CNRL’s expertise in improving operational capacity and efficiency. This will be the first refinery that CNRL has operated and it is questionable that significant financial gains will be extracted. Moreover, what is the rationale for paying CNRL $400-million? Did CNRL have to approve another ownership partner? Was CNRL able to extract $400-million in public money simply in saying yes to the restructuring? Details are scant.
Source: nonfiction studios How is APMC simply replacing NWR called “simplifying ownership?” How will paying $825-million today for an equal equity vote, in exchange for APMC remaining the majority toil payer, a good deal for taxpayers?
The most mysterious question however is the nature of the calculations substantiating the $2-billion in savings? Will the government reveal its assumptions? What is the discount rate used for calculating the cash flows underlying the net present value. With very long periods involved – 37-years- even a one per cent upward adjustment reduces the NPV. A lower discount rate will create a higher NPV. Moreover, the financial model must anticipate positive cash flow to the province from the combining of contributing bitumen and processing bitumen into higher value added products. Would those assumptions stand up to an independent third-party assessor.
How is buying into an operation which the Energy Minister says is losing $28 million a month, a wise investment. Savage says there was no “offramp” for the government. As an equal operating partner, the government is taking on the risks of fire, refining margins, and the inevitability that there will be a decline for the products produces.
This massive boondoggle recalls the agreement between Hydro-Quebec and the Churchill Falls Labrador Development Corporation (CFLDC) which was 65.8 per cent owned by Nalcor, the hydro development authority owned by the Newfoundland and Labrador government and the remainder by Hydro-Quebec. Newfoundland was desperate to develop the hydro-electric potential of Mishtashipu (Big River). Newfoundland’s desperation led to an 1969 agreement whereby the CFLDC sold electricity at a fixed rate for 60 years. This agreement has caused long-term resentment towards Hydro-Quebec for decades. It does appear, that Alberta taxpayers have been fleeced by poor negotiating in the first instance and may be fleeced a second time. A public inquiry is necessary to get to the bottom of this regrettable investment.
The lack of detail and unclear logic about the rationale for this ‘deal’ is alarming. Even more so, the NPV calculations seem like smoke and mirrors without a detailed explanation of the assumptions that underlie the calculations. At the very least a presentation of the case requires identification of critical sensitivities.
Could this Sturgeon Refinery be more about carbon capture than refining?
“According to a recent report by energy consultancy Wood Mackenzie…. Other major carbon capture projects in Canada include the Boundary Dam coal power plant in Saskatchewan and the Sturgeon Refinery CCS project in Alberta.”
Could the Shell just-proposed large-scale new carbon capture and storage project at Scotford Complex in Edmonton as “part of its [Shell’s] strategy to become a net-zero emissions company by 2050” ( Amanda Stephenson, The Canadian Press) explain the Sturgeon Refinery debacle & Savage’s “no off-ramp” comment?
Maybe the Sturgeon Refinery has more to do with Alberta & oil companies getting to net zero on paper & keeping Canada’s claims of being a world leader in carbon capture than with actual refinery production.
https://www.rmotoday.com/beyond-local/shell-proposes-new-carbon-capture-and-storage-project-at-scotford-complex-3954431