December 11, 2013

Refinery costs jump by $2.8 billion

North West Redwater Partnership is updating its project capital cost estimate and revising bitumen processing agreements for the construction of a proposed bitumen upgrader near Fort Saskatchewan, Alberta.

“In November, the boards of directors of both the NWR partners sanctioned the project based on a preliminary estimate at that time of about $5.7 billion,” said Ian MacGregor, chairman of North West Upgrading (NWU) Inc.

“Since that time, NWU has completed significant project engineering and has obtained pricing from major construction contractors. While the scope of the project has not changed, due to a combination of cost inflation and the inability to fully capture certain cost savings initiatives, the cost estimate has been revised to $8.5 billion.”

MacGregor made this comment in a letter to shareholders dated Dec. 4.

He said the project has incurred about $1.5 billion in costs so far and would take an estimated $7 billion to complete.

NWR is a partnership between North West Upgrading Inc. and Canadian Natural Upgrading Limited, which is a wholly owned subsidiary of Canadian Natural Resources Limited (CNRL).

Phase 1 of the Sturgeon Refinery project is designed to process 50,000 barrels per day (bbl/d) of raw bitumen under 30 year fee-for-service processing agreements.

This project represents the first of potentially three phases of 50,000 barrels per day accumulating to a 150,000 barrel per day plan to convert bitumen to high value products, primarily ultra-low sulphur diesel for local and export markets.

The toll payers or suppliers of the bitumen are the Alberta Petroleum and Marketing Commission (75 per cent) and CNRL (25 per cent).

Each party will own their proportionate share of the products produced by the Sturgeon Refinery.

The project capital structure will remain at about 80 per cent debt and 20 per cent equity, but based on the new capital cost estimate about $600 million of additional finance will be required to meet this cost structure.

The toll payers have each committed to advance 50 per cent of the additional financing required to complete the project.

Over the past year, detailed engineering has been undertaken on many process units, firm contractor quotes have been received, material take-offs have been finalized, certain larger contracts have been signed and site preparation activities have started.

The concrete for the first foundation was poured in August and NWR’s contractor worked a 24 hour shift cycle to undertake site grading and compaction, construct runoff containment ponds and build larger worker parking areas.

Construction started on one of the site buildings, which will be used for the final assembly of the very heavy vessel segments which will be shipped to the site. Due to the weight of the assembled vessels, final welding assembly will take place in this on-site building. During the summer, pipeline re-location construction activity was active and pipeline construction activity related to off-site pipelines began.

Once the site grading is complete, work will start on deep-underground infrastructure, such as firewater pipelines and then pile foundations.

NWR currently has a team of more than 300 people working on the project and expects to employ about 8,000 people during peak construction, including sub-suppliers and module fabrication yards.

The revised estimate for project completion is September 2017 in order to optimize productivity and ensure that the project remains cost, not schedule focused.

One of the most important elements of the upgrader’s design is that it will use gasification to produce its own hydrogen from the heaviest components of the bitumen.

As a result of this process, the upgrader will also produce a clean CO2 stream in a useful form.

This CO2 will be sold to Enhanced Energy, where MacGregor is also the chairman.

Enhanced Energy will take the greenhouse gas from the upgrader by pipeline to an enhanced oil recovery project in the Red Deer area of Central Alberta.

The CO2 will be sequestered or injected into the mature oil reservoir, owned by Fairborne Energy Ltd.

The project includes a deal with the Alberta government to process 75,000 bpd of bitumen in lieu of royalties, under the bitumen royalty-in-kind (BRIK) initiative.

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