Here’s to David Black’s Long Shot of the Year

I’ll start by saying I really hope newspaper publisher David Black can pull off his $25-billion refinery, tanker and pipeline project at Kitimat. When a visionary entrepreneur throws something like this up in the air how could you not wish him well?

But there’s a heap of questions to be answered and hurdles to be overcome before you can call it anything more than an ambitious pipe dream. Where to begin?

Black is a newspaper publisher with no working experience in either the pipeline business or the refinery business. Both are highly complex and capital-intense businesses. Black says he’s got industry players interested, but who are they? This project needs an Exxon, a Shell, a Sasol, or some other big player who knows how to make this stuff work.

A memorandum of understanding for $25 billion in debt financing is in place with Swiss-based Oppenheimer Investments Group, with an agreement hoped for within a month. Wow! That’s a lot of debt with no down payment, and coming from an organization that, according to the Globe and Mail, has done nothing bigger than $10 billion and nothing energy-related. Would you loan money to an entrepreneur who isn’t putting anything down himself?

Big refineries tend to be built near big markets. That’s why there are a lot in Houston. This project has zero local market and proposes to ship refined products (gasoline, diesel, jet fuel) to Asian markets. But there are no contracts in place, and Asian customers generally prefer to get the crude oil so they can refine it themselves.

A refinery in Kitimat needs bitumen from Alberta, and again, there are no contracts with Alberta oil producers. They may be lukewarm to this idea because they’re actually looking for a premium price for the oil from Asian buyers. Will Black’s project pay that premium price, given that Canadian oil currently sells in the U.S. for a 40-per-cent discount on the world price?

Black is touting the environmental benefits of shipping gasoline instead of crude oil, arguing that refined products (when spilled on the water) will evaporate and cause less ecological damage. Maybe, but refined products that catch fire after a spill can cause a godawful explosion if you’re unlucky. It takes a lot of work to make crude oil burn.

This project still needs a pipeline through B.C., although Black is holding out the possibility of shipping the oil by rail if a pipeline won’t fly. And I can’t see the current opposition to Enbridge’s Northern Gateway proposal being any less intense for a refinery pipeline. Ditto for First Nations opposition.

When Black made his speech to the B.C. Chamber of Commerce, he indicated that the financing is in place and needs only the formal agreement. But is that financing tied (as it should be) to both contracts for a bitumen supply and sales contracts for the refined products? It took Enbridge several years to line up investors (not debt financing), sign customer contracts, and get suppliers on board just for the pipeline to Kitimat.

If Black can pull this off, he deserves an entrepreneur of the year award from somebody. But I wouldn’t advise holding your breath waiting for it.