Delays at Sturgeon Refinery add to Alberta heavy oil price discount woes

A new refinery touted as part of the solution to Alberta's oversupply of heavy oil likely won't begin processing oilsands bitumen until year-end, several months later than expected.

That means 80,000 barrels per day of diluted bitumen that would have been delivered to the $9.7-billion Sturgeon Refinery near Edmonton is instead joining the queue to be placed on overcrowded pipelines leaving the province.

Multiple equipment failures have prevented the expected mid-2018 startup of the part of the refinery designed to break down heavy, sticky bitumen into an upgraded oil that can then be converted into consumer products, said Ian MacGregor, CEO of co-owner North West Refining Inc.

"I think we're going to be running on bitumen by the end of the year," he said in an interview Wednesday.

'We'll find other problems'

"It will take awhile to come up to full capacity because, as we put bitumen into it, we'll find other problems."

The refinery contains some 7,000 pieces of equipment, each worth $100,000 or more, and getting them all to operate in concert is taking more time than expected, MacGregor said.

The latest setback involves a heat exchanger that was apparently damaged during installation, he said.

The refinery is designed to process 50,000 barrels per day of bitumen and return some 30,000 bpd of diluent to the Alberta market.

Freeing up 80,000 bpd of pipeline space would help tighten discounts on Western Canadian Select bitumen blend versus New York-traded West Texas Intermediate that have widened to as much as US$52 per barrel recently, said analyst Phil Skolnick of Eight Capital.

"I think right now the gap is about 200,000 barrels a day so it's sizable. It's not half of it but it's getting close to half," he said.

WCS discounts are expected to fall to about US$25 per barrel in the first quarter of 2019, he said, due to factors including voluntary production cuts by Alberta producers, increases in crude-by-rail exports and the end of maintenance shutdowns at U.S. refineries that process Canadian crude.

Plant producing diesel from synthetic crude

Sturgeon, the first new refinery built in Alberta in more than 30 years, has been producing diesel from synthetic crude upgraded at an Alberta oilsands mine for the past 11 months.

MacGregor said the operation is benefiting financially as high price discounts on stranded Alberta heavy oil have also begun to affect light oil and synthetic oil, leading to its feedstock costing as much as US$30 per barrel less than usual.

He says the refinery is currently producing between 35,000 and 40,000 barrels per day of diesel.

"If the numbers stay like this, they're going to be astounding when we're running on bitumen," he said.

In spite of that, he said he thinks it "makes sense" for the Alberta government to impose industry-wide production cuts, as suggested by producer Cenovus Energy Inc., to better align output with pipeline space to boost prices and protect its royalty stream.

The refinery is a joint venture of North West Refining and oilsands producer Canadian Natural Resources Ltd., which is to provide 25 per cent of its bitumen feedstock.

The rest is to come from the government-owned Alberta Petroleum Marketing Commission, which can collect royalties in the form of bitumen.

• MORE ENERGY NEWS | One of Canada's largest oilsands players calls for government to mandate production cuts
• MORE CALGARY NEWS | Canada's Olympic and Paralympic committees disappointed but respectful of vote
• MORE CALGARY NEWS | Barriers to accessibility at Calgary's new Central Library
• Read more articles by CBC Calgary, like us on Facebook for updates and subscribe to our CBC Calgary newsletter for the day's news at a glance