Why Rachel Notley's Alberta NDP is still considering building an oil refinery

Conventional wisdom in the oilpatch suggests a refinery in Alberta doesn't make economic sense. And yet, the new NDP government still wants to look at building one. What's up with that?

Under Alberta's new government, the argument against a new oil refinery may have sprung a leak

Big Oil may consider it a non-starter, but looking at a new refinery was one of Alberta Premier Rachel Notley's campaign planks. (CBC)

Rachel Notley's new Alberta NDP government is kicking a dead horse by even considering a new oil refinery, at least according to downtown Calgary.

Accepted oilpatch wisdom suggests the market, which hasn't put up the cash for a major new gasoline-producing refinery in North America since 1984, has already made the decision for her.

Why, then, is Notley's government still pledging to crack open the file and take another look?

"I believe there is a better way to build Alberta's economy, to put refineries like these at the heart of our future growth and prosperity," Notley told supporters at a campaign event in April held in front of a row of upgraders near Edmonton.

For oil types, such talk is like seeing the smoking gun that proves an NDP government simply doesn't understand how the industry works.

And yet, the pro-refinery camp remains undeterred in its belief that Canadians should be more than just hewers of wood and drawers of water.

I wouldn't for an instant say, 'Damn the torpedoes, build a new refinery, no matter what.'– Jim Stanford, Unifor economist

Assuming that both sides of the debate are working with the same dispassionate figures about North American refining capacity, shouldn't the number crunchers be able to arrive at a consensus about whether a refinery makes economic sense?

Clearly, the answer is no. What's more, deep ideological and practical differences exist between the two sides that make a meeting of the minds unlikely.

Landlocked Alberta not ideal 

The bedrock of the argument against spending billions on a refinery, whether the money is private or public, is based in part on the supply and demand fundamentals of the North American refining business.

Since refineries on the U.S. Gulf Coast are already working with spare capacity, why would anyone commit to building a new plant? The refinery game isn't easy. Plants are expensive to build, tough to operate and prone to cost overruns.

"Unless you see some sort of policy that's coming from the government that's saying, 'We'll jump on board and we'll help you get this value-added sector of the provincial economy started,' I can't see a stand-alone commercial development happening," says Dinara Millington, vice-president of research at the Canadian Energy Research Institute.

Alberta may contain vast oil reserves, but as a hub for converting that crude into gasoline, diesel, or jet fuel, it's hamstrung by geography.

An ideal location for a refinery would include access to tidewater, so the end product could be easily shipped to where it's needed; existing infrastructure; and proximity to big markets to limit transportation costs.

Compared to the Gulf Coast's refinery row, landlocked Alberta comes up short.

The flare stacks of an oilsands processing plant in Alberta. (CBC)

The case against building an upgrader for oil sands crude as opposed to a refinery is similar, but also comes with nuances.

To name one, the poor outlook for Alberta's current foray into that game, the North West Upgrader, now known as the Sturgeon Refinery, certainly counts as a strike against the idea that constructing a value-added plant will actually result in adding value. 

In terms of job creation, economists such as the University of Alberta's Andrew Leach also mount a convincing argument that simply shifting employment from extracting oil sands to the refining side of the business isn't a net benefit to the provincial economy.

Additionally, spending public money on a refinery comes with an opportunity cost to other government priorities such as education and health care.

A nation-building project 

Although the hard market logic of building a new refinery would seem to be stacked against the idea, proponents say not so fast. A decision to build a refinery needs to include market-based factors such as the spread between crude prices and refined products, but those aren't the only considerations.

A broader cost-benefit analysis, they argue, that includes measures such as job creation, engineering know-how, and other valuable economic spinoffs to industry shows that a refinery project has the potential to be a big win for the province in the long term. 

"I wouldn't for an instant say, 'Damn the torpedoes, build a new refinery, no matter what,'" says Jim Stanford, an economist with Unifor, the country's largest private sector union. "But I do think the assumption that the private market can make an accurate decision on this unfettered by government is fantasy."

What's in Canadians' public interest, he says, isn't always the same as what's in the best interest of a company such as Exxon. For a company, wanting to put spare refining capacity in to good use is sensible. Whether it's in Canada's best economic interests to see oil sands bitumen refined on the Gulf Coast is another question.

"If you're just looking at it solely as a private company, then you don't care about the jobs that are created, you don't care about the taxes that are paid, you don't care about the engineering capabilities that are developed because you can do this type of thing in your country," says Stanford.

"There are reasons we should pay attention to it from a policy perspective, rather than just assuming that if the market thinks it makes sense then the market will do it."

A different lens 

Whether the market should be the final arbiter of investment decisions or if government intervention has a place is a fundamental question that not only divides the two camps in the refinery debate, but also promises to take on a new currency in provincial politics.

Other NDP platform issues, such as a royalty review, higher corporate taxes and limiting carbon emissions, may be getting more attention, but that doesn't mean the refinery plank was just a calculated throw-in to appease the party's base. 

It may not make economic sense to Big Oil, but in Notley's Alberta it appears that may no longer be the only opinion that matters.


Paul Haavardsrud writes for CBC's western business desk in Calgary. He is also a producer on CBC Radio’s national business desk where he talks about business on Radio One in the afternoons. Prior to that he worked for newspapers. On Twitter, he’s @paulhaavardsrud.