Refinery deal cost Alberta government a bundle, but it will end up making a profit

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The Alberta government has, in recent years, acknowledged that the deal it signed to get Canada’s newest refinery built was a bad one. There is a reason, after all, that critics call the Sturgeon refinery near Edmonton a bitumen boondoggle.

Serving as the province’s energy minister in 2021, Sonya Savage said that the government was bleeding a loss to the refinery to the tune of $28-million a month. Let that figure sink in.

“There’s no question that we inherited a bad deal – Albertans inherited a bad deal,” she told The Globe, speaking of the politicians who put their signatures to paper in 2011, and then doubled down with more financial commitments. The ironclad agreements mean taxpayers took on all the financial risk and cost overruns of the project, which was originally supposed to be half its near-$11-billion price, Ms. Savage said.

But the bad deal aside, the commercial arm of the provincial government now believes the long-term prospects of the refinery could be promising. Officials from that little-known but powerful government body – the Alberta Petroleum Marketing Commission (APMC) – told me that the refinery is likely to turn a net profit of about $30-million this fiscal year. And the most recent report on the refinery shows that by 2083 – the year used to mark the end of the facility’s lifespan – the government is predicting an overall profit of about $20-billion.

What is known for sure is that no matter what happens – even if the refinery goes kaput – the government is committed to paying a total of $35-billion in tolls for the processing of government bitumen, but also for paying off project debt.

If the government’s positive financial scenario for the refinery plays out by 2083, it will be more by luck than design. There are massive caveats about looking 60 years down the road. Nobody has any true idea of what the market for diesel – which the refinery produces from feedstock bitumen – will be by the time today’s preschoolers are of a pensionable age.

It’s the kind of long-term risk-versus-reward scenario only a government would swallow – and in this case, not even that easily. APMC officials said they looked at whether there was a way to exit the refinery contracts, but found none. So instead of stepping out they made the choice to step in, negotiating to take North West Refining Inc.’s 50-per-cent ownership share of the project in 2021. This gives it reason to care what happens by 2083.

In that complicated deal, the government said it optimized the refinery’s value and gave taxpayers greater control over operations. Both private players, North West Refining and Canadian Natural Resources Ltd., were paid a settlement: $425-million to North West and $400-million to CNRL. Those amounts combined were a discount to the $1-billion-plus figure built into the original contract as a guaranteed return on equity for those two companies, APMC officials said.

The optimization process also saw the restructuring of debt and the lengthening of the tolling period. In all, the changes reduced the province’s financial obligations by a slight measure. Combined with strong refinery operations (overseen by CNRL) and higher commodity prices, that takes us to the better financial picture this year, the APMC says.

It is certainly a good thing that a bad deal was made less bad. Also, there is a scenario where we eventually look at a government-sponsored refinery, which came into service in 2020, as a good thing. Building any new energy infrastructure in Canada, or the United States, is fraught. In this respect, the fact the refinery even exists is a bit of a wonder.

The original idea for the refinery was propelling the province beyond the “rip and ship” nature of its resource economy – one reliant on oil pipelines to distant complexes that produce fuels. The facility is already connected to a carbon capture system that proponents argue put it a decade ahead of its time. The 40,000 barrels of diesel produced each day by the refinery goes into the local Alberta market, but APMC officials said they’re now also shipping by railroad to British Columbia, central Canada and the United States.

And while cost escalation is significant, it is by no means unique to this project: The price tag of the federal government-owned Trans Mountain pipeline expansion, for example, jumped 44 per cent from last year’s estimate to $30.9-billion, and could go higher still. Few private players will be interested in new multibillion dollar projects given the financial risks, especially when climate concerns weigh so heavily on all investment decisions.

But with so many public dollars on the line, I’m still frustrated that Alberta reporters were told straight-faced in 2011 that there were no government loan guarantees for the debt related to building costs taken on by private players. Even within then-premier Ed Stelmach’s cabinet, fiscal hawk Ted Morton got in a verbal battle with energy department officials, arguing that the new structure of the deal – which had been halted in 2008 because of a collapse in oil prices – amounted to de facto loan guarantee.

“I am certain that the majority of caucus did not even understand the changes that had been made to the original deal, which did not surprise me. The new deal was now hopelessly complex,” Dr. Morton wrote.

In 2023, the deal is still hopelessly complex. Officials with the APMC said that in a competitive arena they have to protect commercially sensitive information. But given the massive public commitment to the refinery, some degree of financial clarity should be far more forthcoming. I spent months asking Alberta Energy for help understanding the inscrutable APMC report from last June. I only got a response in March.

Albertans are now in the refining business, come hell or high water. But the refinery should serve as lesson in skepticism about the wisdom of long-term public commitments to industrial projects.

And obscuring the financial downside of plans involving billions of public dollars just shouldn’t happen. That includes what is likely to be the United Conservative Party’s post-election push – should they win office again – to give oil companies a financial incentive for cleaning up old wells they’re already legally responsible for.