Opinion: UCP government inherits Sturgeon upgrader nightmare
As if Premier Jason Kenney does not already face enough budget challenges, we now learn that the Alberta government — and by extension, Alberta taxpayers — are on the hook for paying millions of dollars a month for a refinery that is not even operating.
North West Sturgeon refinery’s recent website update stated there continue to be problems getting the gasifier unit to operate, and that it is now “targeting” a commercial startup for processing diluted bitumen for the end of 2019. This is a further six-month delay from the last forecasted startup of Q2/2019. The original start date was scheduled for 2016.
This means that the government of Alberta (75 per cent) and Canadian Natural Resources Ltd. (CNRL) (25 per cent) will continue to pay processing “tolls” of around $30 million a month even though none of its bitumen is being processed. Under the contracts signed by the former PC governments of Ed Stelmach and Alison Redford, this doesn’t matter. The tolls have to be paid to cover the interest on the $8.5 billion of senior debt used to finance the building costs. Building costs were originally estimated at $5.7 billion; rose to $9.7 billion by last year; and will now rise again. All cost overruns are added to the tolling fees.
These payments started in June 2018, and the government’s share to May 31 totals almost $300 million. If the processing of bitumen does not occur until Dec. 31, this amount for the government will rise to about $475 million.
As we have both written before, NWR Sturgeon was driven by short-term politics, not by independent, professional assessments of its economic viability. Potential gains were overstated and risks underestimated. Predictably, the government was badly out-negotiated by its more knowledgeable private-sector counterparts. In NWR Sturgeon, this meant that the government took almost all the risks — guaranteeing payments on $8.5 billion borrowed to pay the constructions costs, even if the upgrader was not operating. And now that’s what’s happened.
No private sector company/lender would ever have agreed to this kind of arrangement (CNRL agreed only because they are on both ends of the deal). But Stelmach and then Redford wanted a trophy to show their voters and donors that they were bringing home the bacon.
NWR Sturgeon refinery has been processing synthetic crude oil into diesel and other products since November 2017. It has used the net income from this processing to pay the operating costs as well as the commissioning costs for the still not operating gasifier. But none of this net income has been paid to the government of Alberta or CNRL.
NWR Sturgeon has virtually no transparency. The May update was the first in 5½ months. No publicly traded company would be permitted to get away with such a lack of disclosure. Even these updates do not contain the operating numbers for barrels processed, barrels of diesel and other products produced. The updates also do not show any financial information for revenues received, feedstock costs, operating costs and financing costs.
There is no disclosure by Sturgeon of the monthly amounts paid by the toll payers since June 1, 2018. We calculated these numbers by looking at CNRL’s quarterly financial statements. If Sturgeon were a public company, like CNRL, they would be required to disclose all this.
Accountability for this mess is just as obscure. No one is taking responsibility for the schedule overruns. The risk and control of the refinery have been split. Control of the construction and operation is with Northwest, which owns 50 per cent of the NWR Sturgeon refinery. It appears that CNRL has little day-to-day control, and the Alberta government even less. Yet the risk is entirely with the Alberta government (75 per cent) and CNRL (25 per cent). They pay for every dollar of all the costs, while Northwest does not pay anything.
So this will be the Stelmach-Redford legacy: $30 million a month for nothing … at 18 months and counting. Let’s hope the Kenney government will not be seduced by the siren song of “refine it where you mine it” into any more boondoggles like this one.
Ted Morton and Brian Livingston are both executive fellows at the School of Public Policy at the University of Calgary.
Both have written before about the NWR Refinery.
Source: Calgary Herald