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Rising Costs May Mean Second Upgrader Falls

Posted by mhudema on July 11, 2008

Rising costs present challenge to second refinery in Saint John

Published Thursday July 10th, 2008

Shell Canada’s decision to scrap plans for a new multi-billion oil refinery in Ontario sheds some light on the challenges facing a second oil refinery in Saint John.

Energy Minister Jack Keir said Shell’s decision shows there are obstacles to Irving Oil and BP’s proposed 300,000 barrel-per-day refinery project in the Port City.

“The good news is that Irving Oil has a partner in BP, they are moving forward in the next stage. They are going through their environmental impact assessment process, which as far as I’m concerned is very positive,” he said.

“But at the same time I think it should make people sit up and say this isn’t going to be smooth, this isn’t a done deal by any means. Irving Oil has been saying that from the beginning. The Sarnia project very clearly shows that.”

Shell Canada, wholly owned by Royal Dutch Shell, has stopped pre-development and engineering work on its proposed refinery in Sarnia, which is home to several refineries and petrochemical plants.

Millions of dollars have already been spent on a plan that now will be shelved indefinitely.

Like all oil companies, Shell has faced rising costs for everything from labour, steel and other building materials.

Irving Oil and BP are spending up to US $100 million on a feasibility study, environmental impact study and other pre-development work on the $7 billion refinery project.

They are expected to make a final decision on whether to proceed with construction sometime in 2009.

Irving Oil spokeswoman Jennifer Parker said both Irving and BP are continuing to work on the second oil refinery studies.

Shell’s Sarnia decision, she said, points to the challenges such projects face in terms of rising labour and construction costs.

“It’s also generally a challenging time for the downstream oil industry, companies like Irving Oil that don’t have their own crude oil.”

Crude oil prices have risen nearly 50 per cent since January.

“That being said, the project we’ve proposed has a number of strengths,” she said. “Significant energy assets that we already have, the logistical advantages of being close to crude supply and the markets we’re going to serve and the skilled workforce in Saint John that already has a lot of experience executing major energy projects.”

The proposed refinery also has the support of the community, she noted.

The value of major capital projects in New Brunswick – such as the liquefied natural gas terminal and Brunswick natural gas pipeline as well as the refurbishment of the Point Lepreau nuclear generating station – has risen to $21.7 billion this year, up over 16 per cent from last year, a new report from the Atlantic Provinces Economic Council states.

Much of that increased amount is due to higher costs estimates for the second refinery and a second nuclear plant.

The refinery cost has been pegged at upwards of $7 billion, that’s a $2-billion dollar increase from the previous low estimate of $5 billion. A second reactor at Point Lepreau is estimated to cost $4 billion.

Tim Curry, president of the Atlantica Centre for Energy in Saint John, which promotes the growth of New Brunswick’s energy sector, said Shell’s Sarnia decision can be looked at both as good news and bad news.

“In one respect it’s a cautionary signal because costs are rising and that’s not isolated to Sarnia,” he said.

But while the going may be getting tougher for refinery projects, those that survive and become a reality will have a ready market waiting for them, Curry said.

“As you’re seeing every time you fill your car, the demand for refined products is not going down.”

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