A 'prudent' approach
Published Friday November 28th, 2008
Energy Building massive projects in two phases is becoming the norm: expert says
SAINT JOHN - Building a second oil refinery in Saint John in two stages would allow Irving Oil Ltd. to test market demand for petroleum products with the first phase and reassess whether to continue building at all.
Experts say low demand for petroleum now, a tight market for accessing credit and a labour shortage in New Brunswick all likely drove Irving Oil's decision.
"The economic return for refiners today is quite different than what it was when they proposed the project," said Cathy Hay, a senior associate at Calgary-based petroleum consulting firm M.J. Ervin & Associates Inc.
"There's no question they would have to take a second look at that investment."
The company announced Thursday it would build a proposed second oil refinery in two stages rather than building one massive refinery, adding at least $1 billion to the overall cost but allowing the company more flexibility in construction.
Irving Oil will decide whether to build the first phase of the project at all some time in 2009 and if it moves forward, begin construction in 2011. A second phase would be decided on later.
The announcement comes as oil projects are put on hold in Alberta.
Royal Dutch Shell Plc (NYSE:RDS.A) delayed seeking regulatory approval for its Carmon Creek oil sands development Thursday as crude prices continued to slide.
Last month, the company put expansion plans for its Athabasca project on hold.
Canadian Natural Resources Ltd. slashed spending on its Horizon oil sands project in Alberta earlier this month, citing spiralling costs and low oil prices.
Irving Oil's project spokesman Kevin Scott said in studies of the project, the company has been addressing a current labour shortage, price volatility, limited material availability, rising capital costs and intensifying global competition.
A report authored by a Moncton, N.B.-based consultant for Irving Oil and the federal government in April said the initial increase in wealth and employment thanks to the proposed second refinery won't be sustained once the project and other provincial megaprojects are built.
Consultant David Campbell said that "there's going to be a huge deflation of the economy," if projects are constructed in a short period of time.
Scott said more recently, the company has kept an eye on dampening demand for petroleum products visible worldwide.
"For the first time we've seen gasoline demand soften," Scott said.
The overall cost of the eight-year, two-stage construction would be around $8 billion, with an output of 300,000 barrels gasoline and diesel.
If the company only moves forward with the first phase, up to 150,000 barrels a day would be produced, Scott said.
Patricia Mohr, vice-president of industry and commodity research at Scotiabank, said building massive energy projects in two phases is becoming the norm, and is the most "prudent" approach Irving Oil could take.
Access to capital is difficult across the board and finding workers is another challenge, Mohr said.
But the price of petroleum is probably the biggest factor in the decision, she said.
"They're probably thinking there would be a market for the first phase and see over time whether there is a market for the second phase," Mohr said.
Scott said that while Irving Oil exports both gasoline and diesel fuel from its existing refinery, the company will focus more heavily on diesel exports for the proposed second project.
"We're looking at trying to shift the other way and looking into the future and the growing demand for diesel and potentially some softening demand for gasoline," Scott said.
The existing oil refinery produces about half diesel and half gasoline, Scott said, adding that with technology, the plant could ramp up diesel production.
Mohr said a higher demand for diesel has been noted worldwide over the last year and diesel prices have comparatively remained higher than tumbling gasoline prices.
The average price of gasoline was 84.3 cents a litre Wednesday, down from 86.9 cents a week ago, according the GasBuddy.com fuel monitoring website. The average price of diesel was $1.075 a litre.
While emerging economies like China and India continue building transportation infrastructure and move to producing and exporting more, diesel demand for trains and trucks will continue and is projected to grow.
"There is a lot of interest in diesel," Mohr said. "People think that diesel demand will be competitively strong."
Hay said there is already a greater market for diesel in Europe, where consumers are increasingly driving cars that run on diesel.
"They use diesel-fuelled vehicles for personal use and that is growing year over year over year," Hay said.
- with files from the Canadian Press
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