Imperial proceeds with $2.6-billion oilsands project as new pipeline obstacle arises in Michigan

CALGARY – Imperial Oil Ltd. said it will build a brand new $2.6-billion oilsands project in Alberta, but a newly elected governor in Michigan threatens the company’s ability to move the additional oil production to its refineries.

Imperial announced late Tuesday it would proceed with its 75,000 barrels per day Aspen oilsands project north of Fort McMurray, Alta., which marks just the second time a new oilsands project has been given a green light since the oil price collapse of 2014, after Canadian Natural Resources Ltd. announced it would build a 40,000 bpd project called Kirby North.

The Aspen project also marks the first full deployment of a technology that combines steam with chemicals, called solvents, that oilsands companies have been experimenting with for years in an attempt to lower carbon emissions.

Construction on the new project will begin before the end of the year and Imperial expects to begin pumping oil from Aspen in 2022, at which point new Canadian export pipelines would be in service, president and CEO Rich Kruger said.

However, there could be fresh problems for a Canadian export pipeline following the U.S. midterm elections Tuesday after Gretchen Whitmer, a Democrat who has vowed to shut down a critical Enbridge pipeline called Line 5, won the Michigan governor’s race.

Enbridge’s Line 5 moves 540,000 barrels of oil per day across Michigan’s Straits of Mackinac between Lake Michigan and Lake Huron toward Sarnia, Ont., where Imperial owns a refinery and a petrochemicals complex.

During the election campaign, Whitmer promised that as governor she would “immediately file to enjoin the easement and begin the legal process to decommission Line 5.”

In October, Enbridge announced a deal with former Michigan governor Rick Snyder, a Republican, to replace the portion of Line 5 that crosses the Straits of Mackinac at an estimated cost of between $350 million to $500 million.

Enbridge spokesman Michael Barnes said in an email the company is continuing to work with the state, but did not address whether a new governor could jettison the agreement with Snyder.

Kruger said during Imperial’s investor day presentations Wednesday that he wasn’t familiar with the new governor’s position but downplayed any potential threat as campaign rhetoric. “I understand campaigns are campaigns,” he said.

He also acknowledged that Canadian oil pipelines are constrained, leading to record-setting discounts for domestic crude and that new production will require new pipeline capacity or move on railway cars.

“I wouldn’t say that we have a surplus of plumbing,” Kruger said of Canadian oil export pipelines. “I don’t have other pipe that would get crude there in a material way.”

Analysts were also critical of the decision to proceed with the project amid ongoing pipeline constraints.

“We suspect the street will question the company pursuing such a large project in the midst of lingering uncertainty with respect to longer-term pipeline egress,” Raymond James analyst Chris Cox wrote in a research note.

Imperial stock was down 1.47 per cent to $41.57 on the Toronto Stock Exchange.

Kruger believes it’s the right time to move ahead with the first oilsands project that uses solvents in addition to steam – a technological breakthrough that is expected to reduce emissions and water use by 25 per cent.

The technology could lead to emissions’ reductions between 17 per cent and 27 per cent, according to a study from IHS Markit.

Michigan Gov.-elect Gretchen Whitmer. Carlos Osorio/AP

“These technologies are potentially transformational for the industry,” IHS Markit vice-president, North American crude oil markets, Kevin Birn said, adding that Aspen would “provide a model for the rest of the industry.”

A handful of other companies including Suncor Energy Inc., Cenovus Energy Inc. and MEG Energy Corp. have been developing their own versions of solvent-assisted, steam-based oilsands plants but Imperial is the first to bring the technology to a full-scale commercial development.

“It can provide a demonstration to the industry and to the world of the next-generation technology,” Birn said, adding that Aspen is also expected to have lower capital costs than previous projects of a similar size.

Aspen, which could eventually be expanded by another 75,000 bpd to produce a total of 150,000 bpd, is an important growth project for Imperial, which was once among the three largest oil and gas producers in Canada but has been leapfrogged by the likes of Canadian Natural and Cenovus after those companies’ major acquisitions in recent years.

Imperial indicated that Aspen, which will be built near the company’s Kearl oilsands mine, would benefit from shared warehousing, workforce housing, transportation and logistics with Kearl.

In addition, the new project would benefit from a wider slowdown in the Alberta economy.

“When’s the best time to build things? When no one else is building them because we will have the highest quality trades,” Kruger said.

• Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan

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