Amid a struggle to ship crude oil to the West Coast, three crazy ideas emerge

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David Black is used to it by now. Ever since the newspaper magnate went public in 2012 with his idea to build a West Coast refinery that would process Alberta bitumen into gasoline, jet fuel and diesel for export, his plan has been met with skepticism at almost every turn.

It’s easy to understand why. Black is a newspaper man, not an oilman. His project doesn’t have the backing (publicly anyway) of the Canadian oil and gas industry. It would also be massively expensive, costing an estimated $32 billion to build, and he says it would return at best 20 per cent to investors. It would also be located in B.C., where other proposed petroleum-related infrastructure projects – notably Enbridge Inc.’s Northern Gateway pipeline and Kinder Morgan Canada’s Trans Mountain pipeline expansion – have faced stiff opposition.

“As a pure merchant refinery, I can’t see how you make it work.”
On the phone from his ­Victoria, British Columbia home, Black doesn’t sound the least bit discouraged, however. In fact, he says he’s enjoying the journey. “I must say, I enjoy puzzles and this is a great puzzle to try to figure out,” Black says.

Apparently, Black is not the only one who enjoys tackling big, oily puzzles. This year two other B.C. groups have hatched ­major plans to process Alberta bitumen. Their projects don’t have any oil and gas industry backing, either. But the groups proposing them sound just as confident as Black does that their ideas are destined to succeed. While the industry continues to shun building refineries and upgraders in Canada (North West Upgrading Inc.’s controversial refinery in ­Redwater, Alberta, is a notable exception), industry outsiders on Canada’s West Coast are ­soldiering on with their bitumen processing projects. But are they on a fool’s errand? Or are they presenting the oil and gas industry with a viable solution to a thorny problem – how to get landlocked oil sands production from Alberta to the West Coast without raising hackles from First Nations and other B.C. residents who fear shipping bitumen in tankers is an environmental disaster waiting to happen.

In June, a company called Pacific Future Energy Corporation announced plans to build and operate a $10-billion refinery in B.C. to process Alberta bitumen and do it in a way that it says will result in nearly zero carbon emissions. The refinery would take 200,000 barrels per day of bitumen and convert it into diesel, gasoline, kerosene and other distillates. Robert Delamar, Pacific Future’s CEO, credits David Black with helping his company get to this point. “We owe him a great debt,” Delamar says. “He really evangelized this idea.”

Along with Black’s project, which is known as Kitimat Clean, and Pacific ­Future’s “near zero” refinery project, the third in the planning stages is headed up by Eagle Spirit Energy Holdings Ltd. and the Vancouver-based Aquilini Investment Group. In April, they announced a plan to build a bitumen upgrader in Alberta or northeastern B.C. along with a pipeline that would ship up to one million ­barrels per day of synthetic crude to Prince ­Rupert. The cost of this project could be a whopping $50 billion.

The “idea” shared by each of these ­proposals is a way to create jobs and benefits for First Nations people and other residents in B.C. and eliminate the risk of shipping raw bitumen from its coast. “I don’t think any project that proposes [shipping bitumen to the West Coast] is going to have any traction because it poses too much risk to the environment in the opinions of the people we’ve met,” says Calvin Helin, chairman and president of Eagle Spirit, a First Nations-owned company.

The three proposals are a response to Enbridge Inc.’s controversial Northern Gateway pipeline project. The $7.9-billion dual-pipeline system would carry 525,000 bpd of bitumen from Bruderheim, ­Alberta, to Kitimat, B.C., and the conditional recommendation from the National Energy Board has recently been approved by the federal government. Nevertheless, the B.C. government says it still isn’t satisfied that British Columbians and First Nations people will reap an adequate share of the economic benefits from Enbridge’s pipelines. It also says it’s not convinced Ottawa’s oil spill response plans are up to snuff. Even after the federal government granted conditional approval for Northern Gateway in June, the B.C. government said it would not be forthcoming with relevant, and required, construction and access permits unless its concerns were alleviated. Meanwhile, 31 First Nations organizations have said they will fight the project in the courts.

“I don’t think any project that proposes [shipping bitumen to the West Coast] is going to have any traction because it poses too much risk to the environment in the opinions of the people we’ve met.”
Northern Gateway has been promoted by Canada’s oil and gas industry as a way to diversify export markets for Alberta bitumen away from the U.S. – where it fetches discounted prices. While America is swimming in oil thanks to the shale and tight oil revolution, the Asian markets that Northern Gateway is intended to serve look extremely promising. Oil sands production is estimated to grow from 2.3 million bpd in 2015 to 4.8 million bpd, according to the Canadian Association of Petroleum Producer’s latest crude oil forecast. However, with that pipeline project’s future very much in doubt, how are oil sands producers going to secure access to those Asian markets?

On the surface, it seems the three B.C. proposals provides a solution to Canada’s bottlenecked export infrastructure. But Andrew Leach, an associate professor and energy economist at the University of ­Alberta’s School of Business, isn’t convinced the economics make sense. “As a pure merchant refinery, I can’t see how you make it work,” Leach says.

A March 2013 IHS CERA report did however say that given the right conditions, new refinery projects in B.C. could indeed work, “assuming that the refinery can consume bitumen, maximize diesel production, control capital costs to a minimum, and maintain a strong price for its products by not oversupplying the market.” However, that’s a lot of assumptions, and when it comes to controlling capital costs, that could be difficult for the B.C. proponents. “They want to build these projects in northern B.C, which is a high-cost and remote environment. You’re going to duplicate what is going on in Fort McMurray,” Leach says.

Black, Helin and Delamar sound undeterred by the skeptics. Perhaps that’s because they seem to view their bitumen processing proposals not only in the light of their economic viability. In the case of the Kitimat Clean project, the company website claims the refinery will create 3,000 permanent jobs and “nearby petrochemical businesses” will create another 3,000 permanent jobs. Thousands of indirect permanent jobs will also spring up thanks to Kitimat Clean and billions of dollars of new tax revenues will be generated for governments, the website says.

Eagle Spirit’s Helin also has more than dollar signs in his eyes when he talks about the upgrader and pipeline project his firm is proposing, or the refineries Black and Pacific Future hope to build. “When you build a pipeline there is not a lot of employment after it’s built. There is a lot of employment in a refinery. There are a lot of high-paying jobs. There will be millions of dollars in business opportunities with an operation of that scale,” Helin says. “You are talking some enormous benefits that can be invested into educating and training people.”

Black says Kitimat Clean’s return on investment will be 10 per cent – a figure that likely wouldn’t impress executives running the big oil companies in downtown Calgary. However, Black is already a wealthy man (his company, Black Press Ltd. publishes 150 titles in print and online) and if his project results in a modest return on investment, he seems fine with that.

“[Kitimat Clean] is not going to make a 15 or 20 per cent return on investment because you invest so much money in the construction phase for quite a long time,” Black says. “But I don’t have to make a fortune here. I’m all about trying to keep the environment safe and do something good for Canada. I really believe this is the only way we’re going to get a West Coast pipeline.”

Will Kitimat Clean or the other project proposals offer an enticing enough return on investment to merit the enormous capital costs? The financial numbers underpinning these projects are hard to come by at this point, especially with two of them having been announced only since April. Yet the backers behind each project are certainly highly credible. The privately held Aquilini Group owns the Vancouver Canucks NHL franchise and is involved in many business fields including construction, real estate, hospitality and agriculture. As for Pacific Future, its executive chairman is Samer Salameh, who manages the telecom practice and new business development for Grupo Salinas – owned by Mexican multi-billionaire Ricardo Salinas Pliego, the 195th richest person in the world, according to Forbes magazine.

Black’s project is furthest along. He has hired Calgary-based Hatch Ltd. to do the front-end engineering and ­design for his refinery and provide an estimate on capital costs for it. Black says that will be done by ­October and that’s when investors can get a look at the design of the refinery and a decision will be made on whether to proceed with the project or not.

He says the gross annual revenue for the ­refinery will be $25 billion and it is expected the $32 billion required to build everything – including refinery, pipeline and port facilities – will be borrowed. Black has approached the federal government about providing a $10-billion loan guarantee for Kitimat Clean. He admits that without this, the project probably won’t get built.

Leach agrees that it will take a helping hand from government for any of these B.C. bitumen processing dreams to ­become a reality. “I’m not particular ­optimistic about their chances. But I wouldn’t be surprised to see something happen government- wise,” he says. “The question governments have to ask is, ‘Do they want to underwrite oil ­processing?’”

Delamar sounds confident, perhaps even a bit brash, that Pacific Future’s plan will eventually see the light of day. The company is confident it can get the financing to build a refinery, and its social license from First Nations and other B.C. stakeholders – something the Northern Gateway project is struggling to secure.

He also says that what Pacific Future is doing isn’t much different from what oil sands pioneers like Syncrude and Suncor Energy Inc. accomplished many years ago against stiff odds – finding a way to make a profit at producing bitumen. “We’re just following in their footsteps,” Delamar says. “Nobody said they could do what they did and they pulled it off.”

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