It’s an odd situation.

But we live in odd economic circumstances.

Immediately firing up Phase II of the soon-to-open Sturgeon Refinery outside Fort Saskatchewan will require a massive provincial government commitment. This in a province that since Ralph Klein days has liked the notion of government staying out of business.

But this commitment, in the long run, makes sense.

And despite Ralph’s proclamation, previous Conservative governments have already substantially invested in Phase I of the new refinery.

Now the New Democrat government is being asked to do the same for Phase II.

The downside is minimal: In a worst-case scenario, the government could lose money for periods of time.

The upside is substantial: In the long run, the province is highly likely to make good profits (see below). Major construction jobs - 5,000 to 8,000 of them – could be created over the next four years when little else is happening; Fabrication shops and other sub-contractors would be kept busy; new tax revenues would come on stream – right now, the refinery pays $40 million a year in property taxes.

Finally, serious economic diversification could be at hand, manufacturing value-added petroleum products in Alberta instead of shipping raw bitumen out of province.

A little background knowledge is in order.

The Alberta government doesn’t collect its oilsands’ royalties in cash, but in kind.

Through the Alberta Petroleum Marketing Corporation, the Alberta government is already a big direct player in the oilsands. It collects and sells about 20% of the total bitumen produced around Fort McMurray. The government agency competes with Suncor, Syncrude etc. in selling bitumen.

The state-of-the-art Sturgeon Refinery was built because the government agreed to send a small percentage of its bitumen to the refinery over the next 30 years. By the end of this year, the refinery will be making 40,000 barrels a day of value-added diesel fuel from the bitumen.

Here’s the odd part: The government will continue to own the diesel fuel that emerges out of the other end of the refinery. The refinery is essentially a service provider. It converts government- owned bitumen to government-owned diesel for a small per-barrel fee. It’s the government that then will sell the diesel – in Western Canada or wherever it can be shipped by pipeline, rail or truck.

NW Refining’s CEO and President Ian MacGregor is proposing the provincial government double up on the existing deal … enabling Phase II of the refinery to get underway, to increase its high-grade, low-sulphur and low-carbon diesel production from 40,000 to 80,000 barrels a day.

Why does the refinery need the government’s bitumen? Because, says MacGregor, it’s available while most of the other oilsands producers use their own bitumen, either for upgrading or to sell to American refineries.

Why should government take the risk of owning and selling diesel fuel? Simple. The refinery would not otherwise have been built. Financial lenders would only take on such risk with higher repayment terms. The refinery would not have been economically viable.

What would accelerating Phase II do for Alberta?


• Employ 5,000 to 8,000 tradespeople over the next four years, when there’s little other industrial building taking place.

• Create new tax revenue – the refinery currently pays over $40 million a year in property tax alone.

• Giving the government the likelihood, especially in the long run, of making more money from creating and selling diesel fuel rather than selling raw bitumen.

• Social license: The government is selling the best diesel made in Canada – top quality, ultra-low in sulphur, qualifying as a low-carbon diesel fuel which is in high demand. The refinery has zero carbon emissions thanks to a C02 collection system that not only buries CO2 underground, but assists in recovering conventional oil from old wells.

I’m not crazy about such intense government involvement.

But MacGregor makes a great case for immediately building Phase II of the Sturgeon Refinery.

“The province is an owner of this resource, and should behalf like an owner,” he says. “Diversification and creating new products out of bitumen enhances value and income. Over half the bitumen produced by oil companies in the oilsands is upgraded or refined – it’s good business!

“We shouldn’t be selling raw bitumen, untaxed, with no job creation. Right now, none of the bitumen owned by the government is processed in Alberta. Even after Phase II, only eight per cent of the provincially owned bitumen will be processed.

“We’ve moaned and groaned enough about diversification. For heaven’s sake, let’s get on with it!"