North West Wants To Quickly Move Ahead With Refinery Construction

November 15, 2011

North West Wants To Quickly Move Ahead With Refinery Construction, FID Due Soon

By Ashok Dutta

NWU/CNRL aims to start onsite work in first quarter 2012 with piles being driven into the ground, to be followed by plant assembly from mid-2013 and production from the first phase will start mid-2015.

North West Upgrading (NWU) aims to make a final investment decision (FID) over the next few months for the 150,000 bbls per day bitumen refinery it plans to build in the Industrial Heartland area of Edmonton, even as it weighs options to move ahead with onsite construction work to avoid rising capital costs of projects.

"By the year end or early 2012, we are targeting to adopt an FID," Jerry Crail, NWU's vice-president of engineering and construction, said in an interview. "We are now in the process of taking a financial proposal to our board of directors for approval. A detailed financial plan is already in place and private investors and financial institutions have pledged funding."

To be located 45 kilometres northeast of Edmonton, the Redwater refinery will be built in three identical phases, each with a capacity of 50,000 barrels per day. The first phase is estimated to cost $5 billion.

The refinery will be owned equally by NWU and Canadian Natural Resources Ltd. (CNRL), with the former acting as operator. For its part, CNRL -- which also expects board sanction for the project in 2012 -- will supply 12,500 bbls per day of bitumen from its oilsands mining projects in the Athabasca region.

Early this year, the Alberta government signed an agreement with NWU/CNRL to supply 37,500 barrels per day of feedstock bitumen, which the provincial government receives under its bitumen-royalty-in-kind, or BRIK, program.

BRIK is the feedstock bitumen that the provincial government makes available for investors in refineries and upgraders in Alberta.

"Certainly, there are operational and financial risks involved in building the refinery, but substantial work has been done for initial concept studies. We now have on board eight companies working on basic engineering, design and refinery specifications. In March 2012, detailed engineering work is due to start," Crail said.

Long-lead items, including reactors and heavy wall columns, have already been fabricated and are lying in Iowa, waiting to be trucked to the construction site, he said.

"Costs are rising and we are trying to move ahead with construction work as soon as we can. We have adopted a modular approach under which 60 per cent to 70 per cent of the equipment is fabricated in smaller sizes and brought to the plant site for assembly," Crail added.

However, availability of labour will be a bottleneck.

"At our peak, we would require 5,000 craftsmen in the Edmonton area," he said.

Six companies have been prequalified for the main construction contracts. They are: Lurgi of Germany; Japan's Toyo Engineering; WorleyParsons of Australia; Calgary-based IMV Projects; and Jacobs Engineering and Fluor Corporation, both of the U.S.

Crail did not comment on the prequalification process, but said at this point no selection has been made.

"As the refinery will be located in the industrial hub, there will be obvious cost advantages. The transportation cost of finished products will be less, as we would use the existing pipeline for reaching out to consumers," he said.

Meanwhile, a Nov. 10 decision by the U.S. State Department to delay a final decision of the Keystone XL pipeline may boost upgrading and refining activity in the province.

"It makes best sense to refine bitumen in Alberta. Since the product [bitumen] has to be first upgraded and then refined it releases twice the volume of CO2 compared with any refinery and thus gets the tag of dirty oil. Our gasification technology is a one-step conversion of bitumen into a refined product. We will be producing diesel that has an increasing demand in Alberta for trucking and farming," Crail said.

The Redwater refinery product slate will include ultra low-sulphur diesel and low-sulphur diesel; naphtha, to be supplied as diluents to oilsands producers for use while transporting bitumen through pipelines; and the remaining a mix of vacuum gas oil, to be sold to refineries that produce gasoline, LPG and sulphur, he said.

"Refining margins are cyclical and vary, but of late they are improving and our projection is of a further improvement over the next few years in Alberta's favour. We have tied up all loose ends with the Alberta government in terms of fees and tolls per barrel to be paid and will submit our final financial plan and construction schedule early next year, before starting onsite work," Crail said.

The Redwater project will be the first greenfield refinery to be built in Alberta after Shell Canada's 100,000 bbls-per-day facility at Scotford in 1984. But, it may not be the last given that oil companies will now have to find an alternate way to market their bitumen.

In-province upgrading of up to 65 per cent of the total bitumen produced in Alberta is part of the platform of Alberta's Progressive Conservative Party.

"The government is still committed to that, although at the end of each year these figures vary due to maintenance works and shut downs," commented Bob McManus, a spokesman at the Department of Energy. "The future will be dictated by the economics of building a greenfield upgrader and on price differentials. The margin in the long term is projected to be positive and we hope to see more refineries being built in the province."

Canadian Association of Petroleum Producers (CAPP) spokesman, Travis Davies, said the government is nearly on track, with at present around 60 per cent of the bitumen produced from oilsands operations being upgraded within the province.

"With Voyager and NWU/CNRL coming on, you'll see that will remain largely the same. However, looking ahead the percentage will depend on how fast we can grow production," he said.

Meanwhile, at an industry conference in Edmonton this summer, Justin Riemer, until recently an assistant deputy minister for Alberta Finance and Enterprise, said the province aims to double upgrading capacity to two million bbls per day, as additional volumes of bitumen are made available under the BRIK program.

"By then [2020], the volume of bitumen to be available will be 400,000 barrels per day, compared with 75,000 barrels per day now and this will open up new opportunities. Our aim will be to emerge as a hub in North America for diesel refining and upgrading of bitumen into synthetic crude oil. By 2020, we will have sufficient volumes of bitumen to support three-to-four NWU/CNRL type facilities," Riemer said.