BC now has two oil refinery proposals, and both have one thing in common: neither of the proponents has any experience in – or backers from – the oil and gas business.
That could be a good thing for winning social licence, says one energy expert, because neither B.C. newspaper mogul David Black nor the Mexican conglomerate Grupo Salinas has the public relations baggage of a big oil company like Enbridge Inc. (TSX:ENB) or Exxon Mobil Corp. (NYSE:XOM), both of which are haunted by a history of massive oil spills.
Black's Kitimat Clean and the new Pacific Future Energy (PFE) refinery both play up environmental angles.
Both would use technology to reduce their environmental footprint, but both would also address the biggest environmental concern for B.C.: eliminating the risk of a spill of bitumen at sea.
“We're not here to ship crude oil,” PFE chairman Samer Salameh told Business in Vancouver. “We're here spending probably another $3 billion beyond what a normal refinery would cost to make this the cleanest refinery ever built. This is the least you could do for the birthplace of Greenpeace.”
“I think the environmental aspect to it is very attractive,” Raymond Crossley, a partner with PwC specializing in energy, said of the two refinery proposals. “Shipping refined product is seen as less risky than shipping bitumen. There is no question in my mind that that is worth something.”
But is it worth $10 billion?
That's how much PFE would need to raise to build its refinery in Kitimat. Black would need to raise twice that for his $21 billion refinery, and that doesn't include the cost of building a new pipeline.
There hasn't been a new oil refinery built in North America for decades, Crossley said, because there is no domestic demand for one in North America. Refineries are typically built near local markets, and they require massive investments.
“These projects are very difficult to execute on,” Crossley said. “They're pretty difficult to finance just because of the sheer magnitude of the dollars.”
Both B.C. refinery projects would need to build pipelines to bring bitumen from Alberta because Enbridge has made it clear that its customers in Alberta aren't interested in supplying oil to domestic refineries.
And that's the central problem for anyone proposing to build a refinery in North America: major energy companies are unlikely to back a Canadian oil refinery because they have their own refineries overseas. They want Canadian oil, not refined petroleum products.
When a pipeline and a tanker fleet are included, Black's refinery proposal swells to $32 billion. Black said he doesn't need a major oil company's backing to finance Kitimat Clean. He said customers in China are willing to underwrite the project. There's just one catch: they want a $10 billion loan guaranteed from Ottawa.
“They'll give us all that money and a low-interest loan; they don't need equity, but they do want some skin in the game from Canada.”
Black added that he doesn't view the PFE project as unwanted competition, but instead as a validation that there's a market for refined Canadian petroleum.
“These are very serious, wealthy businessmen. Salameh works for one of the wealthiest tycoons in Mexico – a billionaire. He's here because he's seen our business plan, and he likes it, and he wants to do it himself. So it's validating.”
A decision on Enbridge Inc.'s (TSX:ENB) $7.9 billion pipeline proposal was expected to be made by June 17. But Ottawa's approval of Northern Gateway could open the door to a string of legal challenges from First Nations. The project was widely expected to be approved by the Harper government, which last week sent senior ministers to speak to a Goldman Sachs forum on energy in New York, where Natural Resources Minister Greg Rickford said the prospect of oil pipelines being built between 2018 and 2020 in B.C. were “fairly safe bets.”
“If Northern Gateway got the green light from the federal government, where is their port going to be?” asked Coastal First Nations executive director Art Sterritt. “If Northern Gateway is trying to access land [in Kitimat], they're going to have to go through the Haisla.”
