Why Rachel Notley's refinery pitch won't solve the oilpatch's problem

Considering the recent oil price crash in Western Canada and the fact a provincial election is expected in the spring, the Alberta government is trying to pull out all the stops to lift the oilpatch out of the doldrums​.

Buying railway oil tank cars, subsidizing petrochemical plants and mandating oil production cuts are some of the NDP's moves to spur activity in the industry or to increase oil prices. Those moves have all received relatively strong support. 

But the government's latest announcement aimed at aiding the industry, to look at building a new refinery in Alberta, is being met with significant skepticism. 

The Alberta government is issuing a request for expressions of interest from the private sector to build a refinery in the province that would use oil extracted here.

Experts say Alberta already has more refinery capacity than it needs and the biggest problem facing the province's oilpatch remains unsolved — a lack of export pipeline space.

"It sounds, if I may be so blunt, like a little bit of desperation," said Roger McKnight, chief petroleum analyst with En-Pro International.

"What is the market? Where is it going? How does it get out of the country?"

The only refinery to be built in Alberta in the past 30 years was the North West Sturgeon Upgrader, north of Edmonton, which was constructed with help from the Alberta government. The refinery's price tag swelled from an estimate of $5.7 billion in 2013 to $9.5 billion. The facility has also faced criticism for only processing up to 50,000 barrels per day and only producing diesel, of which there is already ample supply in the province.

"It's hard to be polite here. That's an awful lot of money for very little return," McKnight said. "I think it was a bit of a mistake."

The Alberta government argues a new refinery would create jobs and create more wealth for the province by exporting a higher-value product. The Sturgeon refinery employed 8,000 people during construction and will employ around 400 full-time workers when it ramps up to full capacity.

Ian MacGregor, chairman of North West Refining, which is part-owner of the Sturgeon facility, says more refineries is exactly what Alberta needs. 

"I believe that refining is the future," he said. "What we have to start doing is we got to quit selling raw material. We've got to sell finished goods."

Constructing a refinery would likely take between five and 10 years, according to experts. Alberta has four refineries with a total capacity of more than 475,000 barrels per day. Two other facilities — Husky's upgrader and asphalt plant in Lloydminster —also process about 110,000 barrels per day into diesel. The province has the largest refining capacity in the country, amounting to about 25 per cent of Canada's total processing volume.

Calgary-based petroleum industry analyst Michael Ervin doesn't expect there will be much interest from industry to build a new refinery in Alberta without a sizeable subsidy.

"I doubt that the private sector will really see a business case for this unless the Alberta government was willing to ante up close to the entire cost of building a refinery," said Ervin, who estimates the cost of constructing a typical refinery at around $15 billion.

Considering the long-term trend of more electric vehicles on the road, Ervin said the business case for a new refinery "just doesn't seem to be there."

'A wish and a dream'

Duane Bratt, a political scientist at Mount Royal University in Calgary, sees Tuesday's announcement as pre-election rhetoric, much different from more recent actions targeting Alberta's oil price woes.

"Whether that's convincing the feds to buy Trans Mountain, or announcing the rail car purchase, or the curtailment of oil production — those are actually concrete things that have happened," Bratt said. "[The refinery] is just a wish and a dream."

The NDP has long favoured constructing more refineries in the province and did campaign on the issue during the last election.

If you were looking at investments you could make as a government in industries that are labour intensive, refining would be way at the bottom of that list.- Andrew Leach, University of Alberta

Submissions from the private sector will be accepted until Feb. 8. Depending on interest, the government may issue a formal request for proposals.

Refineries are often built near high-demand centres and also where labour and construction costs are relatively low, such as in parts of the U.S. and overseas.

University of Alberta economist Andrew Leach said there aren't many details about how committed the government is to seeing a refinery built, or how the proposals would be evaluated.

"So, first pass, certainly nervous about it and not enough detail yet to tell you exactly why," Leach said of the announcement.

Not enough jobs 

But if one of the big arguments for building the facility is jobs, that's not enough, Leach said.

"If you were looking at investments you could make as a government in industries that are labour intensive, refining would be way at the bottom of that list," Leach said.

Why Rachel Notley's Alberta NDP is still considering building an oil refinery

Leach said there's also the economic question of whether the financial return from refining is worth it.

"And the distinction there is, are we creating a product that's more expensive enough to justify all of the labour and capital we'd have to put in to do it?

"And for the most part, in Alberta, the answer has been 'no' for a lot of the previous decades, which is why the commercial interest isn't there."