Birds of a feather flock together

Have you noticed the birds every fall that fly in magnificent formation and seem to have perfect communication or at least perfect confidence in the others in the group. In a second, they can change direction and move in perfect harmony to avoid threats and to find food. In the same way, the public advocates for the new Irving refinery project have formation flying down to a science and the song they are singing is very attractive.

We are assured that this refinery will have the best technology and meet the emission standards demanded by the government. In addition it will create 1000 permanent jobs and a huge number of construction jobs. It is suggested that this project is a necessary component for the “energy hub” that will solve the economic woes of Saint John.

The purpose of the new refinery is to produce fuel for export to New England. North American refineries are presently operating at a 90% capacity factor leaving little room for breakdown. The requirement for additional refining capacity is driven by the tendency to buy SUV’s, vans, and light trucks with poor mileage ratings. Expansions at existing American refineries scheduled for the period of 2007 to 2011 total over 1 million barrels per day. Europe turns increasingly to diesel, giving them the ability to export gas to the U.S. It is likely that North America will eventually turn to high mileage diesel vehicles.

Normally, I don’t comment on private sector investments. However, this project seems to crossover the line between private sector profit and the interests of the local and world community.

The entire “on message” flock; John Baird as the minister of environmental destruction and delay, our Prime Minister, and the Premier have all spoken in favour of this project. What they neglect to mention is that CO2 emissions in New Brunswick will rise by approximately 3 megaton’s. This is a 15% increase on present day levels and not at all the path that most Canadians would prefer.

Help me out here – you increase CO2 levels by a huge amount and actually expect to meet a lower target in the future? That sounds like my diet. Just one more bag of nachos and tomorrow I start.

We have seen that the environmental process in this province favours the proponent. Typically, the proponent hires environmental consultants who produce reports that support a project. Any individual or group who feels that they would be negatively affected has little or no funding for research and representation. They are on their own. A better situation would be to have the proponent pay the cost of studies indirectly through another agency.

The margins on refining operations are high at the moment (~$15 / barrel) and the profits from a refinery of this size would be approximately $1 to $1.5 billion per year or perhaps more. Anyone investing over $5 billion requires significant returns to justify the risk.

refinery-margins-1.jpg

However, this business case requires a constantly growing world supply of crude oil for the next ten years (2017) to permit construction and payback of the investment. Many experts consider a decline of at least 2% per year could begin within five to ten years. A decline of this magnitude would render obsolete five refineries worldwide every year. But it may not arrive as quickly as some believe. Total oil of France predicts the year 2020 and Exxon says 2050. Who is on the mark? From a financial point of view a new refinery looks risky, but it isn’t my money.

What I find deplorable is the waste of assets that will eventually be mothballed and the assignment of scarce manpower that would be better applied building renewable energy projects such as Newfoundland hydro facilities.

The benefits of this project are short term and accrue to the American public and the Irving group. Again the negatives are offloaded on the residents of the Saint John area in the form of higher air pollution and health concerns. Canada increases its CO2 levels without a full accounting for the carbon component.

A second interesting point is the windfall resulting from the method chosen when petroleum products were regulated here in New Brunswick. Choosing the refined product landed in New York as the baseline instead of the world price of crude has created a double whammy for consumers. When tight refining capacity sends prices soaring, revenues to the Irving refinery and others rise even if world crude oil cost has not changed. The chart above works with rough figures, but indicates the growing gap between crude prices and refined prices reflected in refinery profit. Quebec has announced an increased tax on refineries in their recent budget.

There is sufficient rationale to review and modify the Petroleum Products Pricing Act or perhaps a better alternative would be to create a windfall tax on the difference between the crude price and the NY cargo refined product price, corrected for normal refining cost and profit. The revenue from this tax could be as high as $500 million per year. Should Premier Graham wish to be serious about achieving self-sufficiency, he might look in this direction.

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