Alberta’s Sturgeon Refinery set to begin production by end of year

Sturgeon Refinery 45 Km northeast of Edmonton

The $8.5 billion Sturgeon Refinery, Canada’s first new refinery built in over 30 years, is on track to begin processing Alberta oilsands bitumen into ultra-low sulphur diesel by the end of the year.

 

The refinery is owned and operated by the North West Redwater Partnership, a 50-50 alliance between North West Refining and Canadian Natural Resources Ltd.

The plant which is currently 90 per cent complete is located 45 kilometres northeast of Edmonton.  Sturgeon Refinery is relatively close to the Alberta oilsands, home of the world’s third-largest crude reserves.

The Alberta Petroleum Marketing Commission will provide 75 per cent of the feedstock used by the refinery, or about 37,500 b/d, which is valued at about $20 billion at the current market price of about $48/barrel, according to Bloomberg.

Currently, the diesel market is bloated and once producing, the Sturgeon plant will add 40,000 barrels per day of fuel to the market at a time when demand for diesel is lower than it was two years ago.

Diesel prices relative to crude oil are now half what they were three years ago.

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“Diesel demand is dropping in Alberta,” John Auers, executive vice president at energy consultant Turner Mason & Co., told Bloomberg. “Any time you are adding more supply, you are going to impact the price negatively.”

Diesel at a fuel rack in Edmonton has traded at a 32-cent premium to New York futures in the past three months.  That is down by almost half the price three years ago.

Despite the gloomy numbers, North West Refining chief executive and chair Ian MacGregor believes the project could kickstart development in the Edmonton area.

“It’s not the time to start rolling up the sidewalks. It’s time to do something, and this is the best opportunity for diversification we have had in my lifetime,” MacGregor told the Edmonton Journal in December of last year.  “Let’s get going. Let’s not talk it to death.”

Demand for diesel is expected to increase in the coming years. The National Energy Board says that vehicles that move freight, including diesel-burning trucks, will use 5 per cent more energy in 2020 from 2016.

This year alone, energy demand for freight vehicles will increase by 1.6 per cent.

“If you look at any long-term forecast, its showing that Alberta will be diesel short, so there will be economic sense for the refinery,” Dinara Millington, vice president of research at the Canadian Energy Research Institute told Bloomberg.

She added “If that doesn’t transpire, we could potentially export diesel.”

Canada is a net exporter of diesel to the United States, sending 71,000 b/d over the border in 2016.  That is down from 118,000 b/d in 2015.  Most of the diesel goes to the US East Coast which has easy access to the fuel via Eastern Canadian refineries.

In the West, the biggest export market for Canadian diesel is the US West Coast, connected to Alberta by the Trans Mountain Pipeline.

MacGregor says “The U.S. is exporting a million barrels a day of diesel right now. They make our bitumen into a million barrels a day of diesel. Why don’t we do it ourselves?”

“We should be competing with them every minute. We can. We don’t need to send them free food. We need to eat the food here.”

New low-sulphur bunker-fuels will go into effect in 2020, increasing demand for the refinery’s product.  According to Auers, the global distillate demand is expected to increase by as much as 1.5 million b/d, creating a “slug” of demand that refiners may struggle to fulfill.

Despite the expected increase in demand, Auers argues the refinery isn’t worth the money.

“They are paying $9 billion to build that plant and its only processing 50,000 barrels a day of bitumen.”  He adds “It was not a good investment by the crown.”

MacGregor says “What we’re doing here in Alberta is we’re a hostage to transportation and we’re a hostage to refining … We have to quit doing that or it will end badly for us.”

“There’s been a gold rush to get bitumen out of the ground and send it to refineries in the U.S. That’s been a very profitable thing to do, but it’s all backing up now.”