In this last week of the summer of 2021, it seemed appropriate to look back on one of the best moves made on behalf of the Alberta oil and gas industry and every Albertan in conversation with Alberta’s Minister of Energy, Sonya Savage.
First, let’s look at some background….as far back as 2009-2010, the Alberta government under Ed Stelmach contemplated developing bitumen processing facilities in Alberta. There was a long-term vision to incorporate large capacity CCUS by integrating a refinery with the Alberta Carbon Trunk Line (ACTL) and advance Alberta’s capacity for future carbon capture and storage projects. You may be for or against the idea of refining in Alberta, but one must admit, it was a pretty forward-thinking project considering how in 2021, oil producers around the world are now rushing to incorporate CCUS in their projects.
As Alberta Energy Minister Sonya Savage elaborated in an interview with the BOE Report,
“The decision to invest in the refinery was made back in 2012 for very valid policy and political reasons by the previous Stelmach government to support more upgrading and refining in Alberta- to create value add. The idea was to be able to produce low sulfur diesel and will be able to link it into carbon capture and storage with the Alberta Carbon Trunk Line (ACTL) for carbon sequestration. So there were some very valid political reasons at the time for the government to consider getting into the business.”
In 2009, it was stated that ACTL aimed to store 14 million tonnes of CO2 annually and create a backbone of CO2 transportation. In addition, there was the desire to avoid losing the WCS differential to other jurisdictions.
No doubt the financial crisis and oil price crash of 2008 created a sense of urgency to find a solution to the WCS differential and the Sturgeon refinery seemed like part of the solution. The oil price crash saw the WTI price fall from a high of $133.88/bbl in June 2008 to a low of $39.09/bbl in February 2009 and saw WCS go from a high of $115/bbl in July 2008 to $23/bbl in Dec 2008. In their November 2008 fiscal update, the Alberta government reported that in fiscal year 2008/09, it expected to receive approximately $1.1 billion less (or 23%, less) in resource revenues than expected. Further losses were expected in the 2009/10 fiscal year. These revenue losses may have influenced decisions to sign an agreement that later proved problematic.
As Minister Savage explains,
“In this particular case, the reason for the restructuring and the announcement on what we were doing with the Sturgeon Refinery was because the 2012 deal we inherited was bad. The contracts didn’t protect Alberta taxpayers. But there is some good news – it’s the newest refinery in North America and the greenest in North America. It’s connected with carbon capture utilization and storage and going forward there is a market for it. We invested in the refinery not because we saw a huge great economic opportunity for Alberta but because it was the only way to improve the risk profile that the province had taken on under previous contracts. “
Reversing a losing deal
Minister Savage explained that after studying the initial refinery agreements, they determined that they were locked into very restrictive contracts. She says the province perceived that the only way to improve the financial situation for the province was to step in and take an equity position. Then the province would be able to renegotiate the financing and most importantly, would be able to have a say in the operations and the cost controls of the refinery. She emphasized that was the reason the province stepped in – not because they saw a good business case for refining in the province. She elaborated,
“The original deals had the Alberta Petroleum Marketing Commission paying 75% of all the tolls and committed long term. There was no way to get out of that. The tolls included all the costs for operating and building the refinery and it was built with huge cost overruns. So the tolls were astronomically high because of the cost overruns. In addition, the refinery came into service many years late due to operational issues so then the tolls went up even higher. Within those tolls, there was also a Guaranteed Rate of Return on Equity to North West Upgrader and to CNRL. So the government of Alberta was paying 75% of all the costs associated with the refinery, plus giving a guaranteed return rate of return on investment to the owners. They were guaranteed a profit. “
So by stepping in, Minister Savage explained, the province would also share in the upside of the project, achieving a better deal for Albertans in that respect.
The Tolling portion of the Agreement
The dynamics of paying 75% of the tolls for the refinery was an interesting commitment. With a pipeline toll on the common carriage type of pipeline, anybody who’s shipping on the pipeline pays a toll that covers all the operating costs of running the pipeline plus a rate of return (a profit for the pipeline). So, the toll to move your oil on the pipeline is based on a toll (price) that covers all the costs of the pipeline company plus profit. That was the same with the toll for the refinery. The province/APMC owns feedstock and sends it to the refinery to upgrade it- to produce it. The province pays a fee that covers all the costs of the refinery plus a profit. So it’s the same concept. And similar to a pipeline toll, the province was locked into long-term arrangements of Take or Pay. According to Minister Savage,
“We had to pay as a government whether the refinery running or operating at all. So for many years, we were paying that toll, and not a single barrel of bitumen was being processed because the refinery wasn’t operating. We were also paying an extremely higher toll than ever anticipated because of the cost overruns to build the refinery and the cost overruns to operate it. (multi-billion-dollar cost overruns) We were able to eliminate the tolling return on equity. That saved several $100 million by just not having to pay a guaranteed profit to that previous partnership.”
Sharing in the Upside as well as the Risk
Sonya Savage says the Sturgeon refinery was one of the first files she was briefed on when she became Energy Minister in 2019. She says one of the first items that really jumped out at her as she looked at the budget for the Department of Energy was the huge amounts of money being paid out per month at a loss to the refinery. She notes,
“APMC was bleeding loss to the Sturgeon refinery to the tune of over $20 million a month. Alberta basically took on all the risk, all the cost overruns, and all the operational risk of the refinery. So we instructed APMC to start a negotiation process looking to save taxpayers money. They spent a year and a half renegotiating with CNRL and Northwest Upgrading to try to find better terms. At the outset, there was no obligation for any of those parties to renegotiate because they had a locked solid contract but over time APMC came back with this deal.”
A partnership with CCUS and GHG credits
An important part of the restructuring deal is the awarding of GHG credits. According to Minister Savage, there were extensive negotiations between the APMC and the previous partnership on how to deal with CO2 revenues and GHG credits. GHG credits are part of the calculation of the $2 billion of how the value of the refinery has been improved. It’s part of that good CCUS narrative that we have as a province showing that Alberta leads as early pioneers in CCUS technology.
Maureen McCall is an energy professional who writes on issues affecting the energy industry