Is David Black’s plan to build an oil refinery on B.C.’s north coast ambitious or foolhardy?
David Black is still a believer in the printed word. Piles of neatly stacked newspapers line the wood-paneled walls of his spacious home office, which overlooks the Strait of Juan de Fuca in Victoria’s tony Uplands neighborhood.
The one-time civil engineer turned himself into a media baron by taking ownership of a Williams Lake, B.C., newspaper in 1975. In the ensuing decades, he has fashioned a large network of more than 50 free-circulation community broadsheets throughout B.C. and into Alberta. Now, in his late 60s, Black is turning another page in his career and has positioned himself at the center of one of the energy industry’s most challenging problems. A keen sailor who spends his spare time aboard a 77-foot double-masted ketch, he is floating an innovative (and some might say, downright unfeasible) solution to the sticky problem of exporting product from the oil sands and shipping it to markets in Asia. The Kitimat Clean partnership seeks to build Western Canada’s largest refinery, a 550,000-barrel-per-day $15-billion megaproject.
The new refinery would process bitumen transported either by pipeline or rail from oil sands projects in northern Alberta to the same geographic location where Enbridge Inc. would offload oil from its proposed Northern Gateway pipeline into the hulls of massive crude carrier tankers. But the project has opponents in the environmental lobby and naysayers in Alberta’s energy industry – and both parties have expressed their views to the daily papers. Many believe Black’s chances of success with Kitimat Clean are slim to none, but the media-mogul-turned-energy-infrastructure visionary is out to prove the headlines wrong.
The Kitimat Clean project has more than its fair share of doubters. When Richard Dixon initially heard about it, the executive director for the Centre for Natural Resources, Energy and Environment at the Alberta School of Business thought the project was “pretty nuts.”
Dixon’s doubts came from the economics of the project. A memorandum of understanding for debt financing from the Industrial and Commercial Bank of China is about the only thing Black has “nailed down,” he says, giving the impression that it is still in the idea stage. On top of that, there’s no guarantee China needs the value-added product. “We know that China needs gasoline and jet fuel, but there are already huge, profitable refineries in Singapore, India and South Korea that can handle heavier oil capacity,” he says. China is developing two medium-sized refineries every year, a fact that Black doesn’t dispute. In anticipation of this question from oil companies, he laid out a timetable which matches projected Chinese demand, primarily for gasoline and jet fuel, which he imagines will remain high given the rapid growth of China’s middle class.
Black first proposed Kitimat Clean in the middle of August 2012 to much skepticism but has managed so far to warm a few critics to his big idea. Dixon turned out to be one of them. He had his University of Alberta graduate students research the refinery’s feasibility and found that Black might have a business case after all. The construction of the refinery is well within reach, Dixon says, expensive as it may be. Shipments of specialized building materials and factory parts would come from South Korea or China and directly to site, given its location. That’s a must, says Dixon, as ballooning transportation costs on large-scale developments can easily become the final, insurmountable pitfall of capital-intensive projects.
Dixon references Imperial Oil Ltd.’s $12.9-billion Kearl oil sands project as a comparison to Black’s refinery. South Korean contractors built many of the component parts of Imperial’s project, then shipped the 300,000-pound modules across the Pacific to Washington and then up to northern Alberta. The plan didn’t work to perfection. The modules had to be downsized in order to be trucked from the U.S. to Kearl, markedly driving up costs for the first phase of the megaproject, which was originally estimated to cost $7.9 billion. But ultimately Kearl was built and is now producing bitumen. If it eventually worked for Imperial, it might work for Black.
There is certainly a logistical argument to make in defense of Kitimat. The location of the proposed building site is a flat 3,000-hectare sand and gravel site nudged up against a nearby work camp, easily accessible by road, rail and ship. It is in close proximity to yet-to-be-built liquefied natural gas plants, which could power the refinery’s construction and operations. Black says roughly 6,000 construction jobs would be created over the first five years of the project’s life and as many as 1,500 permanent operational jobs upon completion.
Kitimat’s history is inextricably tied to the construction of the Alcan Aluminum, now Rio Tinto Alcan, smelter in 1953. The Alcan smelter was constructed at a cost of $500 million and became the world’s largest aluminum smelter. Consumer demand for aluminum skyrocketed in the post-war era, with aluminum marketed as the “material of the future.” Based at the mouth of Douglas Channel, Kitimat Clean would be B.C.’s largest-ever industrial project – just as the Alcan smelter was six decades ago.
Black had been eyeing these advantages for some time. He researched its cost-effectiveness for the past five years, after chairing “one of those dollar-a-year jobs with B.C. Progress” that looks into potential economic growth areas and job creation. He then hired a consultant to pull some hard data on cash-flow positive oil refining. “His initial report was very encouraging,” Black says.
He then set out on the most challenging part of the mission: seeking approval from the energy industry as an outsider looking in. The newspaper baron was now making a pitch for an enormous, unconventional and perhaps visionary idea. “There really isn’t anything in common between the newspaper business and building a refinery. If I had an oil executive come into my office and tell me how to run my papers, I would likely show him the door, too.”
The executives that Black approached began to come around to his business case, but weren’t in a position to spend money on it. “I think it had to do more with their own corporate ambitions, and the truth of the matter is that refining is at the lower end of where major oil companies want to spend their money. One of the chief executive officers studied it and said, ‘We think your capital expenditures are right on and there’s money to be made, but it’s not for us.’”
There have been a few executives willing to listen, and a select few willing to partner with Black. But some have shown interest. “Let’s face it, if you’re an oil
producer and someone wants to buy your product, then why wouldn’t you consider it?” says Expander Energy Inc.’s CEO James Ross. If built, Black’s refinery would use Expander Energy’s newly patented Fischer-Tropsch Carbon process to refine the most challenging residuals of bitumen – literally scraping the bottom of the barrel – to create a high value, usable fuel.
Ross thinks Kitimat Clean deserves a little more credit from energy executives. “Black really offers a fresh set of eyes on the energy industry. He’s not stuck within a corporate culture with defined company goals or strategy – he believes his refinery can offer his customers a far better product, and we’re willing to listen to that.”
As the owner of 50 regional newspapers throughout B.C., Black is keenly aware of the vehement opposition to Enbridge’s proposed $8-billion Northern Gateway project. “The message from the local communities to Enbridge is loud and clear: we don’t want it,” Black says. Given that the Northern Gateway pipeline would deliver bitumen from the oil sands to his proposed refinery, he remains surprisingly optimistic and unperturbed in his own goal. If Enbridge’s project fails to gain approvals from the energy regulators and from aboriginal groups in B.C., Kitimat Clean would have to rely on oil shipped by rail which is considerably more expensive (and consequently less desirable) for producers.
In February, he released the results of an opinion poll commissioned for Mustel Group, which found surprisingly that British Columbians were in favor of Kitimat Clean on a variety of fronts. The deciding factor, as with the Enbridge project, lay in finding a dependable transportation route from Alberta to B.C. It’s the linchpin holding the project together. If that transportation method can somehow be constructed, the poll said 66 per cent of respondents were in favor, 24 per cent were opposed and 10 per cent unsure. Without foregoing assurance that the pipeline wouldn’t leak, 52 per cent of respondents said they would support the refinery, suggesting the biggest hurdle won’t be the plant, but the pipe. The report further noted strong support from all parts of the province, not just industrial-friendly regions outside of the Lower Mainland.
But the biggest problem specific to the refinery might not be on the ground; rather, it may be the concern about the resulting air quality in Kitimat. Sea fog and industrial pollutants become trapped at ground level in the region during periods of high pressure and temperature inversions. “There are no fewer than 10 possible projects listed for the Kitimat valley,” says Douw Steyn, a professor in the department of earth, ocean and atmospheric sciences at the University of British Columbia. “It is a very sensitive air shed and, although each project is assessed individually, an integrated analysis of all of these projects must first be considered.”
The problem is that Kitimat won’t reach temperatures hot enough to allow those particles to rise higher than the nearby mountainsides. Stagnant air therefore cannot escape and would essentially “slosh back and forth up and down the valley.” The professor has studied other parts of the world such as Norway, which sees a lot of resource activity in its steeply forested fjords and reports that in most cases, there is only one project per valley.
Steyn’s worry is echoed by the mayor of Kitimat. Joanne Monaghan has been a witness to much of the community’s modern history, and recalls that air quality was significantly worse in the 1960s and ’70s than it is now. “There are still a lot of naysayers who worked at the smelter and who don’t want a refinery because the air quality has improved,” she says. The cleaner air is the result of an industrial collapse in Kitimat that forced both Methanex Corp. and Eurocan Pulp and Paper Co. to leave town. Black is betting that the promise of 1,500 permanent refinery jobs will be enough to sway the local population in favor of Kitimat Clean.
Still, he expects opposition from local, provincial, national and even internationally funded environmental groups. Even Black’s local riding of Oak Bay-Gordon Head swung sharply to the left in the last provincial election and the Green Party’s Andrew Weaver, a climate change specialist, ended up in the legislature. The Victoria-based Dogwood Initiative, whose “No Tankers” campaign was a thorn in the side of Enbridge’s Northern Gateway proposition, defers to First Nations. An email from Dogwood Initiative spokesperson Eric Swanson says the group would not oppose the refinery if all affected First Nations and local governments were in favor. At this rate, and given the results of his opinion poll, Black may face a tougher sell among Albertan energy executives than the notoriously green-conscious people of B.C.
Access article here: http://www.albertaoilmagazine.com/2013/08/david-black-ultimate-outsider/