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Sturgeon Plant Economics Improving, North West CEO Says

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Dec. 5 (Bloomberg) -- The economics of an Alberta plant that will turn oil-sands crude into diesel have improved even with the plant’s cost going up by almost half, according to proponent North West Upgrading Inc.

The profit margin for the 50,000-barrel-a-day Sturgeon upgrader and refinery is 10 times higher than in 2010 as bitumen is cheaper and diesel more expensive, Ian MacGregor, chairman of closely held North West, said in a phone interview today. After costs to build and operate the plant, it will earn C$45 a barrel, he said.

North West and partner Canadian Natural Resources Ltd. are moving forward with Sturgeon after the price to build it increased to C$8.5 billion ($7.98 billion) from a previous estimate of C$5.7 billion and startup was delayed a year to September 2017, the companies said yesterday. The project, backed by the Alberta government, faced escalating costs including for engineering and materials, MacGregor said.

“The economics haven’t been challenged at all,” MacGregor said. “C$8.5 billion is a surprise for us and it’s a distasteful surprise but I think of it in the context of the margin and the macroeconomic factors.”

The crack spread of Edmonton rack diesel over Western Canadian Select heavy crude was $85.24 a barrel today, according to data compiled by Bloomberg. The crack spread, a rough measure of the refining profit margin, is up from an average of $64.72 a barrel in 2012.

Others Scrapped

Other plants proposed to upgrade bitumen into higher-value fuels have been scrapped, including Suncor Energy Inc.’s C$11.6 billion Voyageur upgrader in March. Sturgeon benefits from cheaper financing because it has supply commitments from Canadian Natural and the Alberta government, MacGregor said.

That government support may be the reason Sturgeon wasn’t dropped, Kyle Preston, an analyst at National Bank Financial in Calgary, said in a phone interview Dec. 4.

“I’m surprised they’re even going ahead with it,” Preston said. The revised cost is “huge,” amounting to C$170,000 per barrel a day of capacity, he said.

The government is providing 75 percent of the required bitumen, through volumes it receives as royalties from oil-sands producers. Canadian Natural is supplying the rest. If the partners proceed with Sturgeon’s proposed second and third phases to expand to 150,000 barrels a day, they’ll export the diesel from Alberta, MacGregor said.

To contact the reporter on this story: Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Dan Stets at dstets@bloomberg.net

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