Refinery economics not subprime crisis affected NLRC plans

NLRC's plans to build a 300,000 barrel per day refinery in Placentia Bay to serve the North American and European markets ran into financial difficulties apparently due to changing refinery economics, not the shortage of capital or other reasons originally offered by NLRC's director Brian Dalton.

In an interview on June 18, NLRC director Brian Dalton spoke to The Independent.

For some reason, the Indy held the interview with Dalton until this week, even though they had it before press time last week. The interview, on page seven of the June 27 issue gives a completely different perspective on NLRC's problems although the Indy story doesn't reflect the importance of what they had. The NLRC story is inside the paper; a front page story quotes the Premier on his recent efforts in Qatar to save the NLRC project and to promote other local energy projects. The front page focuses on trivial issues rather than on the more serious economic ones.

Neither story is available on line, as of June 27.

"Most refiners in North America have not made money in six months," Dalton says, [in The Independent]...

And that would be about right.

In a Canadian Press story that appeared across Canada the same day Dalton gave that interview, MJ Ervin analyst Cathy Hay said that in May 2008, North American refiners were seeing margins of around 10 cents per litre, compared with 28 cents per litre in May 2007. That's also about five to 10 cents below the margins expected during the peak summer months.

A company would "have to take a hard look at the numbers and figure what's going to happen next year. Is this a trend? If it is, your economics may no longer work," said one industry observer who asked to remain anonymous.

Late last week, some media reports were attributing NLRC's financial problems to the subprime crunch in the United States. According to CBC News, Dalton said the refinery project ran into troubles "due to the deterioration of global capital markets."

In March, Dalton gave similar reasons to Bloomberg:

"Effectively, the debt markets are closed at the moment,'' Dalton said. "It's not a pricing issue, it's just a general availability issue.'' The start of construction "depends very much on when the markets open. We're not going to start it unless we know we can finish it, that's for sure."

None of that matches Dalton's comments on tight refining margins, although tight margins would give investors pause before embarking on a $5.0 billion greenfield project aimed at the North American and European markets.

North American markets are likely shrinking owing to changing American consumer demand, even if only in the short term according to the Canadian Press story.

New refining capacity plus the increased use of alternative fuels like ethanol may also narrow global refining margins according to one Wood Mackenzie analyst. Allan Gelder told Bloomberg in April 2008 that he expects tighter margins through 2012.

European refineries are also experiencing tighter margins. That situation isn't likely to change in the short term.

While demand may be continuing in Asia and other parts of the globe, it's difficult to see the logic behind approaching Middle Eastern and Asian investors for the capital to build a refinery on the opposite side of the world from where the refined oil products would be marketed.

ARAMCO is continuing with its plans to invest in new refineries but those are not planned for Europe or North America. One project, in the Red Sea, would be strategically positioned to supply portions of Europe as well as growing markets in the Middle East, Africa and Asia. Another project, cracking Saudi heavy crude, would refine 400,000 barrels per day. It is planned for Saudi Arabia.

Other companies are investing in expansions to existing refineries in Europe, such as one at Wilton, UK.

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Update: The Indy front page story is now online but the story with real information in it - the one with Brian Dalton held - for some bizarre reason from the week before - is only in the print edition.

NLRC gets 30 days to sort out financials

NLRC has 30 days to sort out its financial affairs, a Supreme Court judge decided yesterday in St. John's.

NLRC sought court protection from its creditors last week, after SNC Lavalin sought payment of over $20 million it claims it's owed by the company proposing a second refinery for the Come by Chance area. SNC Lavalin subsidiary BAE NewPlan told the court payment on the company's design and engineering work stopped six months ago.

SNC Lavalin agreed to the reprieve but offered no public comment on its reasons.

Notice in the scrum [ram audio file] that managing director Brian Dalton uses  a couple of meaningless phrases to skip over the issue of the provincial government's role in funding his project.  No reporters probed the issue further.

There's also an interesting version of the recent corporate history. According to Dalton, the US market "closed very suddenly" earlier this year and as a consequence NLRC shifted direction elsewhere for investors. 

SNC Lavalin is a major contractor on the Lower Churchill development project.  Altius' proposal for an equity stake in the Lower Churchill project is reportedly still active.

The NLRC financial problems have had a dramatic impact on Altius, which owns almost 40% of the refinery venture.  Its stock plummeted last week on news of the bankruptcy proceedings but rebounded slightly with word of the stay. The NLRC - Altius connection figured prominently in many of the news stories running on the Tuesday court decision.

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Province plugging project

[UPDATE! Premier Danny Williams and natural resources minister Kathy Dunderdale will be meeting with unnamed investors on Sunday and Monday in Qatar trying to bail out the troubled NLRC refinery proposal, according to vocm.com.

The news release announcing the trip by the Premier and minister gave no duration for the entire visit, but referred to unspecified meetings in Qatar after the CNA campus graduation ceremony. it appears the trip was planned all along to include specific representations by provincial officials on behalf of a private sector proposal.

On a humorous side note, the government news release still produces a banner at the top of your Internet browser referring to a summer basketball camp, four days after Bond papers first pointed out the programming SNAFU.]

Natural resources minister Kathy Dunderdale told the Telegram that she and Premier Danny Williams are promoting the troubled NLRC refinery project to potential investors during their trip to the Middle East.

"Part of what we are doing over here is looking for new investments and we'll be promoting the refinery in terms of attracting a partner, so hopefully this project's going to continue".

Last week, NLRC director Brian Dalton told an oil and gas industry conference in St. John's that NLRC was actively seeking investment in several areas of the world, including the Middle East, for the stalled project.

NLRC sought court protection from creditors on Friday. SNC Lavalin is seeking approximately $20 million in unpaid fees for engineering and design work done by the consulting firm for the refinery proposal.

In court documents filed Thursday, SNC Lavalin subsidiary BAE-Newplan alleges "NLRC is looking to sell the project without 'independent oversight, review and approval' by unsecured creditors, and made a questionable security arrangement with a related company."

NLRC involves Altius and several European investors in a proposal to build a 300,000 barrel per day refinery in northern Placentia Bay, Newfoundland.

Altius is involved in several mineral and energy developments in Newfoundland and Labrador and elsewhere.

The company lists a Lower Churchill equity stake as one of the projects it is actively pursuing.

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NLRC seeks bankruptcy protection

Newfoundland and Labrador Refining Corporation, proponents of a 300,000 barrel per day heavy sour crude refinery for Placentia Bay are seeking court protection against creditors.

One of the creditors, SNC Lavalin, served notice on Thursday that it was seeking a court declaration that NLRC was bankrupt.

In a statement issued Friday, NLRC said:

NLRC management is currently working with its advisors to determine the optimum method of restructuring, which may include the sale of its assets. A further update will be provided at a later date once key decisions are made.

Earlier this week, NLRC director Brian Dalton told the annual NOIA oil and gas conference that the company was seeking investors in the Middle East, India and the Far East.

The refinery project has been in trouble for some time.

NLRC acknowledged in March 2008 that it had been unsuccessful in finding investors in the United States. Comments at the time were similar to ones given this week to CBC News:

Dalton said the company's problems with financing are "due to the deterioration of global capital markets."

By contrast, as Bond Papers previously noted, Dalton told the Financial Post in April 2007 that the project would only succeed if the company could find one major oil player.

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Related:

"Oh to be in the Gulf now that the cash is in bloom" in which Danny Williams, Kathy Dunderdale, Rodney Macdonald and Gary Lunn all head to the Middle East around the same time.

"Refinery marginalia" (October 2006) which notes, among other things the similarity between a provincial government news release and one issued by NLRC.

"Curious refinery logic" (October 2006)

"Chances of second refinery in NL more remote" (October 2006)

"Two degrees of separation revisited" (August 2006) Altius, Aurora, Newfoundland and Labrador Hydro, Brian Dalton, Dean Macdonald, Danny Williams.

At the same time, Altius is also pursuing a feasibility study on a second refinery in the Come by Chance area. The study was announced in February by Premier Danny Williams and then-energy minister Ed Byrne. The announcement was highly unusual since government [apparently - ed.] played no role in the [apparently - ed.] entirely private venture.

Second refinery project hits capital snag

Plans for a second refinery in the province are being affected by a tightening capital market, according to Bloomberg.com.

Design and engineering work will continue, but the estimated $5.0 billion green field project will not proceed until financing is sorted out.  According to Bloomberg, Newfoundland and Labrador Refining had planned to fund upwards of half the project with debt.

"Effectively, the debt markets are closed at the moment,'' Dalton said.

"It's not a pricing issue, it's just a general availability issue.'' The start of construction "depends very much on when the markets open. We're not going to start it unless we know we can finish it, that's for sure.''

The company's project update, issued Friday,  isn't quite as clear on the financing issue.

In April 2007, NL Refining was seeking at least one financial backer with deep pockets. In January 2007, Bond Papers noted the difficulties likely to come for anyone trying to raise cash for a green field refinery project while at the same time, an expansion project would have considerably less cost and therefore lesser difficulty accessing capital.

By contrast, Harvest Energy announced in February it was considering a $1.0 billion investment to expand capacity at its refinery at Come by Chance.

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Refinery marginalia

Natural resources minister counted some chickens before they were hatched Monday with a statement anticipating construction of a second oil refinery in Newfoundland and Labrador.

As she put it:

The initial stages of the feasibility study on a second refinery for Placentia Bay determined that a new refinery can compete effectively throughout the Atlantic Basin marketplace and the proposed project is now in the final stages of that feasibility process

But a few paragraphs later comes this proviso:

A significant amount of work and analysis still needs to be done before a project of this type can be given the green light to proceed, but I am well aware of the tremendous economic spin offs of additional refinery capacity and I'm delighted with the progress to date.

Government "news" releases are always good at keeping us abreast of crucial developments, like progress reports on a minister's mental well-being. It is vital to know that the minister is "delighted".

Let's take a closer look at the project and forget Dunderdale's mental state.

The first quote is lifted almost word-for-word from Newfoundland and Labrador Refining's release from late September, to wit:

The initial economic analysis completed in Stage One of the feasibility study determined that a new refinery in Placentia Bay can compete effectively throughout the Atlantic Basin marketplace...

But, as Bond Papers has already noted, the sanction for this project will come only if the third stage of the feasibility study - not due until the end of the year. As well, a recent announcement by Irving that it will build a second refinery at Saint John, next to its existing 250,000 barrel per day facility puts a crimp in the economics of the second refinery in Newfoundland and Labrador.

When asked about the impact of the Saint John expansion, Brian Dalton, spokesperson for NL Refining said that the site in Placentia Bay was excellent. Unfortunately for Dalton, site won't be the determining factor in whether or not he and his partners go ahead with the multi-billion dollar project.

Site, in this instance, is like Dunderdale's enthusiasm for the spinoff benefits. That won't matter either when it comes to the business decision of investing in a greenfield project in Newfoundland and Labrador.

Curiously, the project is registered with the provincial environment department, een before project sanction has been achieved. There is still no sign of the project on the federal government's environmental assessment registry.

There are a couple of interesting points to note in the provincial environmental department's description of the project:

2) Southern Head (Placentia Bay) Oil Refinery Project
Proponent: Newfoundland and Labrador Refining Corporation (Reg. 1301)

The proponent proposes to construct an oil refinery at Southern Head, between North Harbour and Come by Chance, at the head of Placentia Bay. The oil refinery is proposed to have an initial production capacity of 300,000 barrels per day with the option to expand to 600,000 barrels per day. Primary products of the oil refinery would be gasoline, kerosene/jet fuel, ultra-low sulphur diesel and refining by-products. Infrastructure required would include process facilities, marine terminal, crude and product storage tanks, access road and utilities. Construction will take approximately three years to complete and production is planned to begin in late 2010 or early 2011. The undertaking was registered on October 25, 2006; public comments are due by December 4, 2006; and the minister's decision is due by December 9, 2006.

1. The proposed refinery will handle heavy sour crude. Historically that type of refinery is the one with the lowest margins and hence is one of the most difficult to make a solid profit on in the long haul.

Come by Chance works because the thing was built and paid off decades ago. Because of the low margins, refineries have typically been built close to market to lower transportation costs.

Come by Chance processes imported crude, mainly from Iraq, largely because Vitol has been able to acquire feedstock at good prices.

Currently all Newfoundland and Labrador crude production is light, sweet. Hebron is a heavy sour field but it will likely not be in production before 2015 at the earliest. Thus, the proposed refinery is likely built on the assumption that it will use imported crude.

2. The planned start of operation is obviously an estimate, contingent on completion of the feasibility process. No one should be getting their knickers in a bunch that Arnold's Cove is about to become the second Calgary.

3. This would be a honkin' big refinery. The Saint John project is estimated to be 300,000 barrels per day. The proposal calls for a refinery project that would ultimately equal the output of both Saint John's existing and planned refineries.

4. Without detailed information on the proposed refinery, it will be extremely difficult to assess for environmental impact of this very large refinery within the very short timeframe provided by the provincial government.

Curious refinery logic

CBC radio snagged Brian Dalton, spokesperson for the group studying the possibility of building a second refinery in Placentia Bay.

He was asked to comment on the prospects that the Irving's announcement of a second refinery at Saint John hurt the potential Dalton's team would go ahead with their project.

[Dalton] said Saint John and Placentia Bay - the site of North Atlantic Refining's operation in Come By Chance and the prospective site for its plans - are the top two ports on the continent for refining traffic.

"You can look in Europe, you can look all along the Eastern Seaboard of North America...these two sites just stand out," Dalton told CBC News.

That's another one of those "Huh?" moments. The ones where you look at the words and develop that face like a dog hearing a noise he can't quite figure out.

The site isn't the driver. It's the cost and the potential to return the money invested.

Dalton didn't speak to that point, nor did he speak to the fact that event Irving's are trying to find funding partners.

Like Dalton's group, which has practically no experience in refinery construction and operations.
But plenty of experience bankrolling projects.

Hmmm.

At Bond Papers, we'll stick to our contention that Irving put a major dent in prospects for a second refinery in this province when they announced a second refinery for the New Brunswick port city.

We'll even add to that.

The chances are much higher now that the overseas investors Dalton and Altius Minerals has lined up will be looking hard at going into business with the Irving's in New Brunswick rather than sinking their billions into a greenfield project in Newfoundland and Labrador.

Two degrees of separation revisited

Revised: 29 Aug 06

A news release late on Monday from Aurora Energy announced the appointment of Angus Bruneau and Dean MacDonald to the company's board of directors.

Dr. Bruneau and Mr. MacDonald are replacing Mr. Brian Dalton and Mr. John Baker who have resigned from the Aurora Board. Mr. Dalton and Mr. Baker, directors of Altius Minerals Corporation, a significant shareholder of Aurora, have expressed the view that the Company [sic] would best be served at this time by their replacement with two fully independent and experienced new directors. The Company [sic] would like to thank Mr. Dalton and Mr. Baker for their valuable contribution in the successful launch of Aurora.

Dalton is president and chief executive officer of Altius Minerals, the second largest share-holder in Aurora. Baker is a director of Altius and a senior partner with White, Ottenheimer and Baker.

Update: Before you go another step take a look at the biogrpahical sketches for Bruneau and MacDonald. Bruneau - who founded Fortis in 1987 and has sat on the Voisey's bay board - fits with Aurora like a glove. MacDonald, whose private sector background is in stuff like cable television, looks like a square peg in the proverbial round hole.

Altius created Aurora Energy in 2003 with Fronteer Development Group to evaluate and explore uranium-rich deposits in central Labrador. Aurora recently completed a successful initial public offering.

In 2005, Altius submitted a proposal to create a royalty trust as a way of financing the Lower Churchill project, currently being pursued by Premier Danny Williams through Newfoundland and Labrador Hydro. MacDonald is the chairman of Hydro's board. According to Altius' website, the royalty trust proposal is still alive.

At the same time, Altius is also pursuing a feasibility study on a second refinery in the Come by Chance area. The study was announced in February by Premier Danny Williams and then-energy minister Ed Byrne. The announcement was highly unusual since government played no role in the entirely private venture.

In early August, Altius announced that Aurora had found significant results in its drilling on the Michelin property in Labrador.

Two degrees of separation, Newfoundland and Labrador style

Following is some simple background information on the project announced today involving a new company that will explore the feasibility of establishing a 300, 000 barrel per day oil refinery, likely on the site between the existing Come By Chance refinery and the Whiffen Head transshipment facility. The Vitol-owned refinery is currently up for sale.

1. The project will be undertaken by Newfoundland and Labrador Refining, a new company comprising investors Altius Minerals and three United Kingdom investors, Dermot Desmond, Harry Dobson and Stephen Posford.

2. Altius' proposal to finance the Lower Churchill project was included by the province last year in the short list of proposals on that hydroelectric project. As reported in The Telegram, "Altius proposes creating a royalty trust that would acquire a percentage of the revenue generated from the sales of Lower Churchill electricity."

3. Dobson and Posford are major shareholders in a new oil and gas exploration company, Borders and Southern Petroleum, that is looking for oil and gas offshore the Falklands.

4. Dobson is chairman of Rambler Minerals and Mining, which created out of a company owned by Altius. In the transaction, Altius retained a 30% interest in the company and a seat on the board of directors for Brian Dalton and John Baker of Altius.

5. Last September, Altius acquired shares in Alba Mineral Resources, a company chaired by Desmond.