Morton: Sturgeon refinery costs continue to mount

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Who is on the hoof for cost overruns at the North West Redwater Partnership's Sturgeon Refinery? Postmedia file

Cost overruns at the North West Redwater Partnership’s Sturgeon refinery are back in the news. The Government of Alberta has confirmed that capital costs are now estimated at $9.3 billion, about a billion more than the last estimate in 2014. And that estimate was $2 billion higher than the 2011 estimate of $6.5 billion. It also confirmed that the Sturgeon upgrader will not fully open in October of this year as planned, but in June 2018. Originally, it was supposed to be fully operational in October 2016.

Why does this matter? Because the government — and by extension, Alberta taxpayers — are on the hook to pay for it. The government must pay North West a “toll” to upgrade its bitumen to diesel, and this toll is calculated to repay total construction costs plus a 5 per cent return. Bottom line: $26 billion of tolls over the next 30 years. And that was before the latest cost overruns and delays.

Both opposition parties have asked Alberta’s Auditor General to review the risks that the Sturgeon refinery poses to taxpayers. Here are the questions that should be answered.

  1. Who will absorb the additional $1 billion cost overrun: the Government of Alberta or North West?
  2. Will the delay in opening the Sturgeon upgrader cost the government additional money? And if so, how much?
  3. Is there still a diesel shortage in Western Canada? If not, will this make it more likely that the government will be selling its diesel for less than it cost to produce?

Question 1:

The Alberta government, North West and Alta Corp all agree that there are another $1 billion in construction cost overruns for the Sturgeon upgrader. So who will absorb these additional costs? It’s not the bond-holders who have loaned North West over $6 billion. Those bonds are signed, sealed and delivered. Alta Corp says it’s not North West. That leaves the Alberta government, but officials there claim that their tolling payments will not be increased. The problem is that up until now, the formula for calculating the government’s tolling payments has included all construction costs. Has something changed?

Question 2:

Eighty per cent of the construction costs for North West Sturgeon have been paid for with borrowed money — corporate bonds. While these bonds are issued by North West, in practice they will be paid by the Alberta government. As Alta Corp notes, under the “take or pay” conditions that the government agreed to back in 2012, “the Province of Alberta effectively guarantee[s] the underlying bonds.” And, as a recent Moody’s update noted, these “debt tolls related to the debt financing are due no matter what, including delays in construction.”

We now have a delay in construction: June, 2018 rather than October, 2017 (or really 2016). What effect will these delays have on government financial obligations? Interest must start being paid to bond-holders as soon as the money is borrowed. To date, $6.35 billion has been borrowed. Time is money. How much interest has the government paid to date? Or is the interest accrued to date just being deferred and added to the final costs of the project — thus increasing the toll payments that the government will have to pay to have its bitumen upgraded?

Question 3:

One of the justifications for the government’s financial support for the Sturgeon upgrader was the chronic diesel shortage experienced in Alberta during the fall harvest in the last decade. Recent reports suggest there is no longer a shortage. Is this true? If there is no longer a diesel shortage, will this make it more likely that the government will be selling its diesel for less that it cost to produce?

The economics of the North West Sturgeon upgrader and the government’s financial obligations are a matter of concern to all Albertans. Hopefully the Auditor General’s investigation will answer these important questions.

Ted Morton is a Senior Fellow at the School of Public Policy and at the Manning Centre for Building Democracy. In 2011 he served as Alberta’s Minister of Energy

Source: Calgary Herald