ABP leader Greg Clark pushing for Sturgeon Refinery ‘risk assessment’ after $800 million over-runs

Sturgeon Refinery

Sturgeon Refinery, joint venture between North West Refining and CNRL.

“I believe this is a good recommendation and should underpin future policy steps the Alberta govt might consider” – economist Michal C. Moore

For the second time in 18 months, Alberta Party Leader Greg Clark has asked the Alberta auditor general to review the financial risk to the Alberta government of its involvement with the Sturgeon Refinery, most recently after it was learned there would be an additional $800 million cost overrun on the project and the refinery would not be fully operational until the second quarter of 2018.

Sturgeon RefineryIn a letter dated Jan. 4, 2016 Clark wrote to Auditor General Merwan Saher requesting a “special report to the Legislative Assembly evaluating the extent of risk to Alberta taxpayers” from the government’s involvement  in the refinery project.

Also noted was the likelihood of a Moody’s credit downgrade (which occurred several months after) for the Northwest Redwater Refining Partnership, the project proponent, which in turn was a 50/50 arrangement between North West Refining and Canadian Natural Resources Ltd., one of the province’s largest oil and gas producers.

“…it is important that Albertans have a clear understanding of the financial risks involved in supporting this project,” Clark wrote.

Saher replied on Jan. 15 that his office was already conducting “audit work” on the Sturgeon Refinery, therefore he had no intention of preparing a special report.

The review was to include a “systems audit” of  the “risk management activities” of the Alberta Petroleum Marketing Commission, which acted as the government’s agent. A report was expected in fiscal year 2017.

How did the Alberta government end up in an apparently risky arrangement?

Former PC finance minister Ted Morton, now back in academia with the School of Public Policy, released a study in 2015 that tells the Sturgeon Refinery’s backstory.

ride sharingThe government would require producers to pay their royalties in actual bitumen production. “Armed with its own stream of bitumen production, the GOA could in turn sign contracts with prospective merchant upgraders to guarantee them the long-term supply needed to attract investors,” Morton writes. “As public policy, it was low-risk, low-cost, almost elegant.”

Economist Michal C. Moore of Cornell University says taking product in lieu of payment was a backdoor way to provide a cushion under the industry.

“The province absorbed and spread risk into the public sector (not unlike insurance company practices),” he said in an email. “They bet on an expanding and resilient future for this project.”

The 2008 recession, however, blew apart the government’s elegant strategy. Several planned upgraders were cancelled and the only project left standing was the Sturgeon Refinery, which negotiated a new deal with the Stelmach government in 2010.

The government of Alberta would retain ownership of the bitumen, pay the refinery a processing fee or “toll” for upgrading, and then sell the upgraded products into the market, according to Morton.

Construction costs were rising (from $ 4 million to $5.7 million),  “with payment on these bonds effectively guaranteed by the GOA’s 30-year ‘take-or-pay’ tolling contract,” he wrote. “This new arrangement effectively transferred the risk of upgrading to the government — a liability estimated to cost $19 billion in tolls over the 30-year contract.”

Sturgeon Refinery

Prof. Michal C. Moore.

By 2013, construction costs zoomed to $8.3 billion.

“All the upgraders have been problematic in terms of technology (which keeps advancing and replacing old technology) which continuously seems to cost more than when we first plan them,” says Moore. “Bids and estimates are always optimistic for projects like this, and basically always over-estimate timing, performance, and cost control.”

Clark notes in this 2016 letter that the Alberta Petroleum Marketing commission, acting as the government’s agent, had already provided $340 million financing to the project.

When Clark discovered that Sturgeon Refinery costs had risen to $9.1 billion, thanks to an Altacorp analyst’s report, he sent a June 27 letter to the Auditor General dated asking once again for a special report to the Legislative Assembly, noting the changes that had occurred since his last request.

One of those changes included rumours that North West Refining was interested in selling its 50 per cent stake in the refinery.

Sturgeon Refinery

Greg Clark, Alberta Party leader.

“I ask that you also look into the impact of any potential sale as part of your Special Report,” Clark wrote to Saher.

North West Refining issued a press release defending itself, claiming that while some costs escalated due to a higher than expected currency exchange rate, minor scope changes, and productivity challenges, the capital cost increases have been partially offset by $1 billion in cost savings resulting from lower financing costs.

“Because of these savings, the actual toll payable for refining the province’s bitumen will be in line with the 2013 estimate,” the company said in its release.

This time around, Clark has been joined by Wildrose energy critic Drew Barnes, who said in a Wednesday press release, “I support any review by the Auditor General into spending at the Sturgeon Refinery, as this situation has become a massive boondoggle for the people of this province.”

Moore agrees with Clark and Barnes. He thinks an Auditor General’s special report is the way to go.

“I believe this is a good recommendation and should underpin any future policy steps the Alberta government might consider,” he said.
“A combination of depressed or even flat prices, combined with inevitable cost increases, as well as higher operating costs in the future, should be a discussion point for the government at this time – much as companies do in anticipation of future losses. Writing down those losses in terms of public disclosure today can help soften the impact.”
Sturgeon Refinery

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