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The following article appeared in the OGI Quarterly, Fall 1998 edition

It is reproduced here with the permission of June Warren Publishing Ltd

Upgrading the Upgrader

Husky Oil announces $500 million expansion

By BRENT KOSTYNIUK

When Husky Oil Limited recently announced a $500 million expansion project for its Lloydminster Upgrader, it really marked the culmination of 50-years of faith in the heavy oil deposits of the region.

The story actually begins in 1938 when Glenn Nielson started the Husky Refining Company in Cody, WY. Nielson set up shop just in time to cash in on the petroleum shortage brought about by World War II. By 1946 however, times were leaner and Nielson needed a boost. That shot in the arm came from the Lloydminster Board of Trade which invited him to inspect the area's newly discovered heavy oil deposits. Nielson gathered samples of the Lloydminster crude and sent them back to Cody for analysis. They were found to contain 45 to 50 percent asphalt. Nielson reasoned, quite correctly, that asphalt would soon be in huge demand for major highway building programs in Western Canada. Moreover, while the boom was developing, Husky could supply bunker fuel for the railways to use in their steam locomotives.

Ever a wise businessman, Nielson purchased land which was positioned between the Canadian Pacific and Canadian National railway lines. This virtually guaranteed contracts with the railways. One hurdle remained for the fledgling oil company. A residual wartime shortage of steel meant that it would be almost impossible to construct a refinery using new material. The situation was solved by dismantling Husky’s Riverton, WY plant, loading it on 40 railway flat cars, and shipping it up to Lloydminster. The trip took one month, with reconstruction spanning one of the coldest winters on record. Perseverance paid off. On July 10,1947, the rebuilt refinery went on stream producing 2,500 bbl/d of bunker fuel. Two years later production had nearly doubled, and by 1950 output was up to 10,000 bbl/d.

Throughout the early 1950s, Husky continued to expand its refinery and acquire more land. It also started drilling in the area. Initially, 14 wells were drilled, with seven being producers. During 1954, bunker fuel output reached a peak of 4,100 bbl/d. The bottom very quickly fell out of the market, however, as railways switched to diesel locomotives. Husky responded by adding equipment to the refinery to produce new products, and by entering the fuel oil and gasoline market.

The market for heavy oil products increased again in the early 1960s. Husky responded with its $35 million Lloydminster Project which eventually raised production to 12,000 bbl/d. A key segment of the expansion project was a reversible pipeline, nicknamed yoyo. The 72-mile line pumped condensate from the Interprovincial Pipe Line (IPL) station at Hardisty to the Lloydminster refinery. The condensate was blended with heavy crude, lowering its viscosity to the point where it could be moved through the same line back to Hardisty. From there IPL transported the blended heavy crude to markets in Eastern Canada and the United States. In 1965 the original six inch line was twinned with a new eight inch line. About the same time, a new automated control centre for the pipeline was installed at Lloydminster.

Another major step forward came in 1966 when Husky signed a lease agreement with Canadian Pacific for oil and gas rights to about 1 million acres of railway land. Early drilling confirmed enormous reserves of heavy oil and gas.

By 1977, Husky's Lloydminster refinery had been producing a variety of petroleum products for 30 years. Years of expansion, overhauls and improvement had ensured its efficiency, but the time had come for a new facility For the first time in its history, Husky was to have a state of the art refinery. The new $100 million facility came on stream in 1983.

As part of the project, a new pipeline was built to the Cold Lake heavy oilfields and another new line completed the looping between Lloydminster and Hardisty. This made it possible to ship even more Lloydminster Blend to eastern markets. The new refinery incorporated the latest technology in crude distillation.

Efficiency was improved and environmental protection features reduced emissions and noise levels. Husky’s 1983 annual report proudly proclaimed the facility had "...the most advanced process control and energy conservation features of any comparable unit in Canada and twice the capacity of the previous plant." Further, the report speculated, "we are in an ideal position to take advantage of future increases in western Canadian asphalt markets."

The prediction proved correct. Opening of the new plant coincided with major road and highway rebuilding programs in both Western Canada and the U.S. With this came increases in both production and profit. In 1986 Husky marked its fourth consecutive year of record breaking performance. The company had become Canada's largest marketer of heavy crude oil.

The paint had barely dried on the new plant when Husky once more set its eyes on the future. This time the dream was completion of a project which had been

discussed since the 1960s, the Bi™provincial Upgrader The Upgrader would process heavy oil feedstock into high quality synthetic crude oil. In 1984, an agreement was reached between Husky and its financial partners, the governments of Alberta, Saskatchewan and Canada.

Construction of the Upgrader was important from both the oil industry's and Husky's perspectives. For the industry, the Upgrader created a significant new market for heavy oil, supporting the growth of Western Canada's heavy oil production.

For Husky the Upgrader further enhanced the company's diverse asset base, and balanced out the seasonal production of asphalt with year round synthetic crude production. Of course, Lloydminster gained through increased property and business taxes, and from expenditure in capital and operating expenses. As well, permanent and contract employment opportunities were created for local residents.

The Upgrader required in excess of 3.2 million person hours of engineering work. It marked an important Canadian milestone, as it was the largest and most complex project of its kind engineered exclusively in this country. Five Alberta and Saskatchewan based firms accomplished this achievement. Construction of the $1.6 billion plant began in 1989 and continued until November 1992. The project created 6,700 person years of employment, with 3,800 jobs at the peak of the construction period. Labour for the project was 100 percent Canadian, with 97 percent coming from Alberta and Saskatchewan.

Now, Husky has announced plans for a $500 million expansion project which will more than double the size of the Lloydminster Upgrader. The proposed expansion will increase production of synthetic crude oil to an ultimate potential capacity in excess of 100,000 bbl/d. "This project is part of Husky's continuing strategic investment in the Lloydminster area," says John C. S. Lau, CEO.

Those feelings are echoed by Doug Stout, Husky's VP, oil and gas product marketing. "The expansion of the Upgrader will serve to further strengthen Husky's position in Canada's heavy oil sector. Operating efficiency and reliability will be improved. The opportunity to further develop Husky's heavy oil deposits will be enhanced with some 60 to 80 percent of the feedstock targeted to be obtained from the company's proprietary production. As a result of the integration of key assets, Husky will be better positioned to withstand the vagaries of the heavy crude oil marketplace.""

The increased capacity will be realized through construction of several new processing units and expansion of associated facilities using proven technology. The expansion will provide up to 1,450 person years of employment during the design and construction stages. Approximately 1,000 full time jobs will be created at the peak of construction activity. Up to 75 permanent positions will be filled once operations begin in 2001. The Upgrader expansion will also create some 200 indirect jobs for the region. Pending regulatory approval, construction is planned to begin during the second half of 1999 and will continue for 24 to 26 months.

Roy Warnock, manager of the Upgrader, looks forward to the expansion and its ultimate commissioning. "The Upgrader expansion will increase the economic attractiveness of the overall facility. Maximum use will be made of the existing plant infrastructure and resources in an effort to reduce overall unit operating costs. Because the expanded facility will use much of the same technology as the existing plant, the current highly skilled workforce will be effective in bringing the expansion online in a safe and efficient manner."

News of the expansion project came only months after Husky acquired total control of the existing facility. Back in August 1994, Husky had purchased the ownership interest held by the governments of Canada and Alberta. Then in February 1998, Husky's one remaining partner, CIC Industrial Interests, a subsidiary of a Crown corporation of the Province of Saskatchewan, sold its 50 percent interest in the Upgrader to Husky. The facility was renamed the Husky Oil Lloydminster Upgrader.

Reports at the time indicated both sides were happy with the deal. "We have recovered every dollar that Saskatchewan put into this Upgrader over the years," said Premier Roy Romanow. Husky CEO Lau expressed similar enthusiasm and hinted at the Upgrader expansion. "This purchase reaffirms Husky's long-term commitment to the Upgrader and to the Lloydminster area, and gives our corporation flexibility as we plan for the future development of our heavy oil assets."

The very next month Husky and TransAlta Energy, as joint venturers, inked a deal with SaskPower for the long term sale of electricity. Beginning in December 1999, SaskPower will buy 210 MW of power annually from a natural gas fired cogeneration facility to be constructed jointly by Husky and TransAlta on the Upgrader site. Known as the Meridian Cogeneration Project, the operation will also supply steam to the Upgrader The project is seen as an environmentally responsible option for both Husky and SaskPower because it is fueled by natural gas and makes use of existing infrastructure on the Upgrader site. It’s expected work on the $160 million facility will provide up to 300 person years of work during design and construction stages, with up to 150 workers on site at peak phases. The value of the electricity sale is estimated to be $50 million in the first year of operation, rising to an average of $80 million annually over the 25 year term of the contract. The plant will be operated jointly by Husky and TransAlta.