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Upgrader Backgrounder

Since the background article below, the Government of Saskatchewan has sold its share of the Bi-Provincial Upgrader to Husky Oil which now operates the facility as the Husky Oil Lloydminster Upgrader.  As of 1998, a $500 million expansion was announced, still pending in 2010.  However, a co-generator plant and an ethanol plant has been added.

Press Release: August 5, 1994

HUSKY OIL AND THE GOVERNMENT OF SASKATCHEWAN
WILL PURCHASE CANADA AND ALBERTA'S EQUITY OWNERSHIP
IN THE BI-PROVINCIAL UPGRADER

REGINA... Husky Oil and the governments of Canada, Alberta and Saskatchewan today announced that Husky and Saskatchewan will purchase Canada and Alberta's equity ownership in the Bi-Provincial Upgrader in Lloydminster, Saskatchewan.

The agreement-in-principle, subject to final documentation, will keep the 46,000 barrel-a-day Upgrader open. Husky Oil's equity ownership in the Upgrader will rise to 50 per cent from its current level of 26.67 per cent. The Government of Saskatchewan, through its Crown Investments Corporation, will see its equity ownership rise to 50 per cent from 17.5 per cent. The cost of purchasing Canada and Alberta's equity will be borne by Husky and Saskatchewan proportionally to their increased equity positions.

The terms of the agreement include:
A cash payment on closing of $41.96 million to the Government of Canada for its 31.67 per cent equity ownership.
A cash payment on closing of $32.02 million to the Government of Alberta for its 24.17 per cent equity ownership.
Provision for the governments of Canada and Alberta to receive annual Upside Interest payments over a 20-year period commencing January 1995 if the price differential between heavy oil and synthetic crude exceeds $6.50 per barrel. The Upside Interest will be based on an incremental pricing scale and a two-year rolling average of the differential. It will be calculated on the basis of the Upgrader's annual sales and each government's former equity position.

Two-year selling price protection for Canada and Alberta. Under this provision, Canada and Alberta will receive the benefit of any higher purchase price if either Husky or Saskatchewan buy or sell any equity or interest in the Upgrader.
Maintenance of the provision that feedstock will be sourced equally from Alberta and Saskatchewan, subject to availability of supply.
Provision for Canada and Alberta to have no ongoing liability for the operation of the Upgrader.

"This is a good deal," Natural Resources Minister Anne McLellan said. "Under the terms of this agreement, the federal government will have no further liability for financing the project. As well, we will receive a portion of the profits if the operation of the Upgrader becomes profitable. This deal demonstrates the Government of Canada's determination to be fiscally responsible – we recognize that we do not have any more money to invest in this project."

Alberta Energy Minister Patricia Black said: "The people of Alberta gave the government a strong mandate in the provincial election last year to get out of the business of owning businesses. Our decision to sell Alberta's equity in the Bi-Provincial Upgrader is consistent with this mandate. We are pleased that we have been able to reach an agreement that keeps the plant open yet removes any further financial risk to Alberta taxpayers."

Saskatchewan Minister of Crown Investments John Penner said "With this restructuring, CIC and Husky have accepted the challenge of operating the Upgrader and preserving the jobs in Lloydminster and in the oil patch. We believe that we can meet this challenge and, at the same time, protect and preserve the money that Saskatchewan taxpayers have invested in this project."

Husky CEO John Lau is pleased that the Bi-Provincial Upgrader (BPU) will continue to operate and stated that "Husky has always treated the BPU as a long-term investment; current losses at the BPU are primarily due to the low differential between feedstock prices and product prices. We are continuing to review the effectiveness and efficiency of the BPU's operations, and if the differential increases over the next few years, we expect the BPU to have a positive cash flow."

Mr. Lau added that Husky was pleased to continue to have Saskatchewan as its joint venture partner. Husky, a major heavy oil producer, has played a significant role in the Lloydminster area since 1946 and is committed to continuing its representation in the region.

The Upgrader was officially opened on November 20, 1992, with a designed upgrading capacity of 46,000 barrels per day. To date it has produced 26.7 million barrels of synthetic crude oil. For the first six months of 1994, the Upgrader produced 48,000 barrels of synthetic crude daily. Situated in Saskatchewan 6 km east of the Alberta border, the Upgrader has a current workforce of slightly more than 400 employees and contracted personnel.

For further information, please contact: Government of Canada -- Office of the Minister of Natural Resources, Ottawa, Ontario (613) 996-2007; Government of Saskatchewan – Director of Communications, Crown Investments Corporation of Saskatchewan, Regina, Saskatchewan(306) 787-6851; Government of Alberta -- Communications Director, Alberta Department of Energy, Edmonton, Alberta (780) 427-8697; Husky Oil Ltd. – Corporate Communications Manager, Calgary, Alberta (403) 298-7188.

BACKGROUNDER -- BI-PROVINCIAL UPGRADER

Brief History

The Bi-Provincial Upgrader (BPU) was officially opened on November 20, 1992.

In June 1984, an agreement in principle was signed by the governments of Canada, Alberta and Saskatchewan and Husky Oil of Calgary. This agreement called for an integrated project consisting of an upgrader, Husky's Lloydminster refinery and associated field operations. The following years, the parties agreed not to pursue further the project on the basis of the agreed principle.

In 1986, an agreement cleared the way for Husky to proceed with basic engineering studies for a stand-alone upgrader. The three governments provided $63 million in Petroleum and Gas Revenue Tax and royalty reductions to Husky as contributions towards the $90 million cost of the studies.

On September 2, 1988, a binding Joint Venture Agreement (JVA) was signed by the four parties to construct and operate the heavy oil upgrader, to be located just east of Lloydminster in Saskatchewan.

Under terms of the JVA, the Upgrader would be owned by the three governments and Husky Oil Ltd. The participants were to contribute to the capital cost according to their respective interests: Government of Canada, 31.67%; Husky Oil Operations Limited, 26.67%; Government of Alberta, 24.17%; and the Crown Investments Corporation (CIC), on behalf of the Government of Saskatchewan, 17.5%.

Authorized spending for the project totaled $1.267 billion. Because of cost overruns, the actual construction cost rose to $1.632 billion, 29% over estimate.

A 12-member Joint Venture Board -- three members nominated by each of the participants -- was given overall authority and responsibility to manage the business affairs of the Upgrader. Husky was designated construction manager and operator, responsible for day-to-day operations.

The upgrader required more than 3.2 million person hours of engineering work, which was completed in late 1991. It was the only project of such a scale and complexity to be exclusively engineered in Canada by Alberta and Saskatchewan firms. At the peak of construction more than 3800 workers were employed on the site.

The turnover from construction to operations was completed in August 1992. The Upgrader produced its first barrel of synthetic crude in July 1992. By September 6, 1992, the upgrader had produced its one millionth barrel of synthetic crude oil, three months ahead of the date specified in the 1988 JVA.

Role of Upgrader

The demand for heavy fuel oil (or residual fuel oil) has been declining in Canada and throughout the world since the late 1970s. In recent years, production of heavy crude oil and bitumen has been increasing. This creates the need to convert the heavy crudes into lighter refined products. The BPU converts heavy oil and bitumen crude oil from the Lloydminster and Cold Lake areas into high quality light synthetic crude oil.

The upgrader was initially designed to produce about 46,000 barrels of synthetic crude oil per day. This synthetic crude is then processed by conventional refineries into premium transportation fuels and petrochemical feedstock. Production for the first six months of 1994 has averaged 48,000 barrels per day.

Cost Overruns

In March 1991, it became evident that the Upgrader would exceed the authorized construction cost of $1.267 billion. In July 1991, the Joint Venture Board requested an additional $175 million to cover cost overruns. The additional funding was approved by the four equity partners in October 1991. By January 1992, the estimated cost overrun of $175 million increased by $190 million, raising the total overrun to $365 million, mainly because of the fast-track construction schedule. (Fast tracking means construction begins before all engineering and design work is completed.)

CIC did not contribute its share of the $190 million second cost overrun. The governments of Canada and Alberta, along with Husky, agreed to pay their proportional shares as well as Saskatchewan's share of the additional $190 million cost overrun. Under the terms of the arrangements covering the second cost overrun, CIC was not to receive any cash flow from the project until the other participants had been repaid the funds they contributed on behalf of CIC.

Operating Shortfalls

Under the original JVA, the partners agreed to contribute up to a total of $50 million towards operating shortfalls.

In June 1993, the governments of Canada and Alberta, as well as Husky, agreed to contribute their share of operating shortfalls up to $80 million. Also, Canada and Husky agreed to contribute CIC's portion of the shortfalls between $50 and $80 million.

In March 1994, Husky advised the partners that operating shortfalls would reach the $80 million level by early April. On April 10, 1994, Husky agreed to provide up to $6 million in funding to keep the project going until June 10, 1994. At this time, the joint venture partners sought to resolve several outstanding issues, including agreement on a mechanism for future shortfall funding. Husky advised the three governments that a further operating shortfall of $16 million was expected before the break-even point was reached.

During this time, Husky indicated that if the other partners wanted to curtail their obligations for further cash contributions, it would be willing to increase its equity position in the Upgrader. Alberta and Canada expressed interest in the opportunity to sell their equity investment. Saskatchewan indicated that it wished to retain its equity share, and was interested in increasing its equity position. Since then, Canada and Alberta have been negotiating with Husky and CIC over terms for the change in the equity positions.

BI-PROVINCIAL UPGRADER -- FUNDING SUMMARY

Government of Canada Participation

Construction (Capital) Costs

Canada's contribution toward the construction cost was as follows:

Capital Contributions Project ($000) Canada's Share (%) ($000)
Initial Project 1,267,000 31.61% 401,217
First Cost Overrun 175,000 31.67% 55,417
Second Cost Overrun* 190,000 38.38% 12,930
Total Construction Capital 1,632,000 32.45 % 529,564

* Saskatchewan did not participate in the second cost overrun. The governments of Canada and Alberta, along with Husky, paid the Saskatchewan share as well as their own.

Operating Shortfalls

Canada's contribution toward the operating shortfalls was as follows:

Operating Shortfalls Project ($000) Canada's Share (%) ($000)
Initial Operating Shortfall 50,000 31.67% 15,833
Second Operating Shortfall (to April 10, 1994)* 30,000 41.17% 12,350
Third Operating Shortfall (April 10-June 10, 1994) 6,000 -- --
Total Operating Shortfalls (to June 10, 1994) 86,000 32.77% 28,183

* Saskatchewan did not participate in the funding of the second operating shortfall. Canada and Husky paid the Saskatchewan share as well as their own.

To summarize, Canada's share of the construction (capital) costs totaled $529,564,000 and its share of the operating shortfall was $28,183,000 for a combined total of $557,747,000. The sale of its equity position returned $41,960,000 plus a share of possible future profits. If these profits do not materialize, the Government of Canada will realize a loss of $515,787,000 on the project.

Government of Alberta Participation

Construction (Capital) Costs

Alberta financed its share (24.17%) of the Upgrader construction cost through the Alberta Heritage Savings Trust Fund. As a result of cost overruns, the Upgrader construction costs increased from the $1.267 billion authorized in the 1988 Joint Venture Agreement to $1.632 billion.

Alberta's contribution towards the construction cost was as follows:

Capital Contributions Project ($000) Alberta's Share (%) ($000)
Initial Project Capital 1,267,000 24.17% 306,192
First Cost Overrun 175,000 24.17% 42,292
Second Cost Overrun 190,000 29.29%* 55,657
Total Construction Capital 1,632,000 24.76% 404,140

* Saskatchewan refused to pay its share of this cost overrun. The governments of Canada and Alberta, along with Husky, paid the Saskatchewan share as well as their own.

Operating Shortfalls

As the operating shortfalls are not capital costs, Alberta could not pay its share from the Alberta Heritage Savings Trust Fund. To meet its obligation, therefore, Alberta created a special purpose corporation -- 540540 Alberta Ltd.

The corporation is restricted to funding the province's share of the Upgrader operating shortfalls. It could only borrow from the Alberta Provincial Corporation Loan Fund, an agency that lends to Crown corporations. Interest costs incurred by 540540 Alberta Ltd. are paid out of the Department of Energy Budget. To date these costs total $1 million. The corporation's financial statements are audited by the provincial Auditor General and appear in the Public Accounts.

Alberta's contribution towards the operating shortfalls was as follows:

Operating Shortfalls Project ($000) Alberta's Share (%) ($000)
Initial Operating Shortfall 50,000 24.17% 12,083
Second Operating Shortfall (to April 10, 1994) 30,000 24.17% 7,250
Third Operating Shortfall (April 10 - August 3, 1994) 8,975 Nil Nil
Total Operating Shortfalls (to August 3, 1994) 88,975 -- 19,333

To summarize, Alberta's share of construction (capital) costs totaled $404,140,000, and its share of the operating shortfall was $19,333,000. An additional $1,000,000 was required for interest on funds borrowed by 540540 Alberta Ltd. Combined, these expenditures bring Alberta's total contribution to the Upgrader to $424,473,000. The Government of Alberta realized from the sale of its equity position $32,020,000. Any possible future profits are likely to be offset by continuing interest charges so that the Government of Alberta will sustain a loss of $392,453,000 on the project.

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