Alberta taxpayers could be on hook for $26B oil refinery

The debate over upgrading bitumen in Alberta has long been fraughtwith hard-nosed economics facing off against the political desireto add value to raw bitumen selling it for a higher price, while stillcreating good jobs in the province.

Before the 2008 crash, there were multiple private sector proposals for upgraders around Edmonton, but the economics fell apart as oil prices dropped.

Only one of those plans, the North West Sturgeon Upgrader,went aheadwithbacking fromthe provincial government and Canadian Natural Resources. It's expensive, long-delayed and Ted Morton, a former Tory cabinet minister who had a role in the decision, says taxpayers are on the hook for the project that is going to have a hard time making any moneyonce it opens in 2017.

I think there were four different premiers, six different energy ministers, so there was a lack of due diligence certainly on the part of the Government of Alberta.- Ted Morton, former Alberta cabinet minister

In a nine-page reportwritten for the University of Calgary's School of Public Policy, Morton describes a project that morphed from something he described as elegant to a very expensive potential boondoggle.

The story began in 2007 when the provincedecided to allow oilsands producers to pay their royalties in kind meaning they could give the provincial governmentbitumen instead of cash.

The province would then sell the bitumen to one of the upgraders being proposed in Alberta and get the cash. This would essentially guarantee a 30-year supply of bitumen to the upgraders, something they needed to make the economic case for their projects.

• Alberta upgrader deal could be reached by fall

"Basically what it said was anybody who wants to build a standalone, merchant upgrader, the Government of Alberta will guarantee a 30-year of supply of bitumen," said Morton.

"Initially that looked like it was going to work, but the 2008 recession hit, almost everything was cancelled and it was after that the deal was changed."

Numbers disputed

Morton suggests that as the economics deteriorated, the provinceforged ahead, reluctant to give up a political commitment and threw its weight behind the one remaining upgrader project the North West Sturgeon Upgrader.

"It became obvious that the initial incentive of just guaranteeing the 30-year of supply of bitumen would not be sufficient. And so the deal was sweetened," said Morton.

As the years moved on and the construction costs increased, Morton says the deal continued to be sweetened to the point where taxpayers are now essentially on the hook for $63 per barrel in processing costsover the 30-year life of the program. That's a number that is clearly not economic at the current level of energy prices.

Late on Friday, the North West Redwater Partnership, which is building the upgrader, responded to Morton's report, suggesting his numbers are wrong. NWR is effectivelya partnership between Canadian Natural Resources and the provincial government.

Here is a portion of the statement:

The paper determined the costs per barrel by reference to 50,000 barrels per day of raw bitumen. This is not appropriate because the feedstock the refinery will process is diluted bitumen in the quantity of approximately 78,000 barrels per day. By using the wrong feedstock and quantity the processing fee is over stated by over 55 per cent.

NWR says, by its math, the toll is actually less than $35 per barrel of diluted bitumen.

Morton saysthe Department of Energy saidit was committed to $26 billion in toll payments over the 30 year life of the upgrader. The dispute is around how much bitumen will be upgraded over the 30-year toll period.

Mortonopposed to deal in 2010

When Morton was appointed Albertafinance minister in 2010, and became aware of the new terms of the deal, he says he was "alarmed at the financial risk" the province was taking on.

"We had some big arguments and, basically, I got outvoted."

Morton says commitment to processing fees is effectively a provincial loan guarantee for much of the cost of the project and the story of the North West Upgrader is a cautionary tale for government.

"The North West Upgrader is just the most recent example of a long line of failed government initiatives in Alberta of diversification," said Morton.

"And it fits the larger pattern. Typically government don't have as much expertise as their private sector partners, as result, they tend to get out negotiated. Governments tend to take most of the risk, put up most of the money and if there are any profits, get little of that."