Alberta takes 50% stake in troubled Sturgeon Refinery, as CNRL, North West Refining see combined $825-million payday

Article content

CALGARY – Alberta’s government is taking a direct equity stake in the troubled Sturgeon Refinery in an effort to reduce its tolling costs at the facility.

Article content

“There’s no question that there were problems in the past with the contracts,” Alberta Energy Minister Sonya Savage told the Financial Post on Monday, noting the multi-billion cost overruns and blown deadlines for the facility had created a strain on the province’s balance sheet.

In an effort to find cost savings, Savage said the province took a “deep dive” in 2020 into the oil-processing contracts for the Sturgeon Refinery that were signed by former premier Ed Stelmach’s government in 2011.

On Monday, Alberta announced a new deal. North West Refining will be paid $425 million to forego future tolling revenue and for its 50 per cent equity stake in the 79,000-barrels-per-day heavy oil refinery north of Edmonton. Canadian Natural Resources Ltd., which owns the other 50 per cent of the refinery, will also be paid $400 million immediately.

Article content

In total, the $825 million in payments to NorthWest Refining and CNRL will eliminate $1 billion in tolling payments to both companies over the next 10 years, as well as transfer North West Refining’s equity stake to the Alberta government.

In addition, the province has agreed to extend the timeframe during which it will process its barrels at the Sturgeon Refinery by 10 years to 2058.

I think that with the deal we’ve got, we’ve definitely reached a better deal for Albertans

Sonya Savage, Alberta energy minister

The province and CNRL, now equal partners in the Sturgeon Refinery, also renegotiated the financing for the facility, which will improve the net present value of the refinery by $2 billion, Savage said.

“There was no legal requirement for the other parties to renegotiate or bondholders to renegotiate,” Savage said, adding that under the previous deal the province was looking at “a money losing proposition for years with no ability for Alberta taxpayers to participate in the upside.”

Article content

“But I think that with the deal we’ve got, we’ve definitely reached a better deal for Albertans,” she said.

The Sturgeon Refinery, which has previously been called the North West Upgrader or Redwater Refinery, is a heavy oil refinery north of Edmonton built with the backing of provincial government contracts signed at an initial cost of $5.4 billion. But the troubled project more than doubled its initial budget and was finally completed last year at a cost of close to $11 billion.

The facility also suffered operational delays amid problems with a critical component, called the gasifier, which prevented the facility from refining heavy oil until April 2020.

As costs rose, so did the tolls Alberta’s government had to pay to the refinery’s owners to refine its royalty barrels at the facility. Experts have repeatedly criticized the tolling arrangement for saddling the Alberta government with unlimited risk and costs.

Article content

Last year, the Alberta Petroleum Marketing Commission reported a $2.7 billion net loss for the year “due primarily to a provision for the Sturgeon Refinery onerous contract,” according to the province’s annual report.

The Sturgeon Refinery contributed to a $500-million operating loss for the APMC last year.

Canadian Natural will now operate the facility. The Calgary-based oil major wrote the value of its stake in the facility down to nil at the end of 2019.

Alberta’s auditor general has looked into the contracts between the province and the refinery twice, first in Feb. 2018 and then in Nov. 2020, and released scathing reports in both cases.

The auditor general’s report from 2018 found the APMC “has poorly designed risk management processes.”

Article content

In Nov. 2020, the auditor general found the province’s energy department had not conducted a proper analysis on three different oil-related contracts between the government and private-sector energy companies, including the Sturgeon Refinery, the Alberta government’s stake in the now cancelled Keystone XL project and crude-by-rail contracts.

Savage said previous governments had “policy reasons and political reasons” for proceeding with money-losing agreements on the Sturgeon Refinery, and said there were multiple lessons for the government to learn as a result.

“First of all, there wasn’t an offramp for the government. There wasn’t a way to control costs. That’s where you saw a refinery that was estimated to cost $5 billion escalate to over $10 billion, close to $11 billion,” she said.

Financial Post

• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan