As explained below, the new Kitimat refinery will be the lowest cost producer of refined fuels in the entire Pacific Basin. It could profitably sell its output at a lower price than any other refinery on the west coast of the America’s or on the east coast of Asia. Therefore it has a ready market today and since there is little chance its basic economic advantages will change, it will have a ready market for decades. Rapidly growing countries in Asia, such as China and India, require more refined fuels each year. There is no competition for KC in these countries except from new refineries yet to be built. KC will be capable of landing refined fuels in these countries less expensively than they can be made from their new refineries. Other Pacific countries do not need more fuel each year. Yet here again KC can deliver at a lower cost than the existing refineries, many of which are small and out of date. In short, the market is wide open for KC.
Supply of Crude Oil
Canada currently exports roughly 2.5 million barrels of oil per day. By 2030 Canada must find markets for 2.0 million more barrels per day. However all export pipelines run to the US and that country found a great deal of new oil in its shale formations. In 2012, the US imported 11 million barrels per day of crude oil. By 2020 US imports are forecast to drop to 8 million barrels per day. Canada must compete with many other countries to export oil to the US, especially in the Gulf region that can easily be supplied from overseas. So far Canada has successfully maintained its export volumes by selling its oil at low prices.
KC will purchase, or charge a toll fee to process, 400,000 barrels per day of pure bitumen from Alberta.
There is sufficient bitumen in the Canadian oil sands to last 200 years at the projected rate of development.
The refinery will be located on the 1,000 hectare Wedeene Industrial Site in Kitimat Valley, BC. The site is between Kitimat and Terrace approximately 25 kilometers to the north of the Marine Terminal on Douglas Channel. After construction, permanent employees will live in or near Kitimat and Terrace. The site is currently Crown land designated for industrial use by the Regional District of Kitimat-Stikine.
All export oil refineries are built near the sea for ease of transporting large prefabricated components during construction and for delivering separated refinery outputs during operation. Locating on the Pacific is important as the only growing oil markets in the world are China and India.
There is sufficient space at the Wedeene site for the refinery, office, tank farms, railway spurs, electrical power generation facilities, sewage and water treatment areas and expansion room for additional refinery and petro chemical facilities if desired and approved in future.
Some pundits argue that the refinery should be located in Alberta. Unfortunately, economics do not allow Canada to build an inland upgrader or refinery. KC’s consultants estimate the additional costs of building in Northern Alberta could be up to $10 billion more.
Other pundits believe the refinery should be located in Prince Rupert to avoid shipping in the Douglas Channel. Prince Rupert lacks the space for a refinery. There is no need to avoid Douglas Channel, which is a very safe, wide and deep waterway.
There is little on the Wedeene site today. Some old forestry roads remain from when it was last logged. Currently the only major industrial operation in the region is the Rio Tinto aluminum smelter in Kitimat which has just had a major modernization resulting in a reduction of permanent employment from 1,400 workers to 1,000. A number of major LNG export projects have been proposed for the Douglas Channel foreshore area but the current LNG market has turned against these.
Kitimat Clean will receive solid bitumen by rail from Alberta. The bitumen will be melted out of the train cars at the refinery.
Existing road and electrical infrastructure border the property. The location is only 20 miles from CN’s main line and its Rio Tinto spur line runs through the site.
A 10 inch and a 6 inch natural gas line run through the site. Additional gas lines are proposed to feed the LNG plants planned for the area. There should not be any conflicts in land use from any of these lines. There are no safety or other concerns with these lines being in proximity to the refinery.
Three dedicated 18 inch product pipelines will run from the refinery to a marine terminal on the Douglas Channel.
Construction of the refinery will require the construction of a 15 kilometer “heavy haul road” to move prefabricated modules and other materials from port facilities in Kitimat to the site. It is expected that this will follow the existing alignment of a main forest road running from Kitimat to Lakelse Lake and Terrace. The road will require widening, some straightening, and substantial strengthening. Bridges along the road will require rebuilding.
The Wedeene site is between the Little Wedeene River and the Wedeene River to the west of Iron Mountain. It is roughly ten square kilometers, or 1000 hectares, in size. Elevation is approximately 200 meters above sea level. No site surveys have been completed by the proponent and none are on record. There are few watercourses.
No BC Agricultural Reserves exist within the site or are proposed.
Preliminary conversations with the Kitselas and Haisla First Nations indicate archeological values are low.
A 287 kv BC Hydro transmission line runs through the site. KC will tie in to the BCTC line but it will provide its own electricity from the Fischer Tropsch processing, which is exothermic.
KC will provide its own water and sewage treatment facilities. The refinery will require 250,000 barrels per day of fresh water. Roughly 125,000 bpd will come from water wells. Another 125,000 bpd will be generated as a by-product of the Fischer Tropsch process.
The projected capital cost of the refinery is $22 billion. The tidewater location will enable the modular construction, transportation and installation of large refinery components from lower cost but technically proficient countries.
Based on projected cash flows, all loans would be repaid within ten years once operations begin. The payback for the Federal government could be as short as one year given the tax revenues involved in BC and Alberta and the potential impact on Canadian dilbit prices to the US.
Integrating the Fischer Tropsch process with other state-of-the-art heavy oil refining processes will result in the production of roughly 320,000 barrels of diesel, 110,000 barrels of gasoline and 60,000 barrels of jet fuel per day. This compares to 400,000 barrels per day of bitumen coming into the plant.
About 80% of the operating cost in a refinery is the cost of the oil feedstock. Experts believe the Alberta bitumen feedstock will remain at least $25 per barrel cheaper than the Mideast crude oil that is typically imported by all Asian refineries. The difference in feedstock pricing gives the Kitimat refinery a 20% cost advantage.
The second largest cost for a Fischer Tropsch refinery, 7% of operating cost, is natural gas. Natural gas is roughly three times more expensive in Asia, providing another 10% overall cost advantage for KC.
Labour will be more expensive in Canada than in Asian countries but it accounts for only 2% of refinery operating costs.
Scale of production is a big factor in the cost per barrel of refining as fixed costs are distributed over a larger volume of output. The Kitimat plant will be twice as large as the average refinery in the Far East. It will be in the top ten in the world and will have lower throughput costs as a result.
Shipping costs will be less. There will be no need to transport diluent across the ocean. In addition the distance from Kitimat to the Far East is less than from the Mideast. And when compared to the North American Gulf of Mexico refineries, there is a $20 per barrel transportation advantage shipping to the Far East.
In conclusion, the Kitimat refinery will have an large cost advantage over any other refinery in North America or on the Pacific basin.