Last Monday (26 October) the NDP shared information from a number of confidential briefing documents, between SaskPower and the Government, concerning the Boundary Dam carbon capture scheme.
This, as one might expect, gave rise to heated debate in the Legislature and extensive media coverage.
We take a look, distill the issues, highlight what is missing and suggest that discussion on this issue is just getting started.
Design & Construction deficiencies at Boundary Dam
The NDP refers to "serious design flaws" in the briefing document which notes;
"Despite advising SNC-Lavalin about these deficiencies, SaskPower has had to correct many of the deficiencies itself. In addition, SaskPower has had to perform work that is within SNC-Lavalin’s responsibilities.... The above noted breaches by SNC-Lavalin have resulted in SaskPower incurring substantial, additional costs."
(Hansard; 29-Oct-2015; page 7546)
The Carbon Capture facility at Boundary Dam is operating well below capacity
"As a result of capture plant schedule delays caused by SNC-Lavalin and other contractors, SaskPower was unable to commence carbon dioxide deliveries to Cenovus until October 1st, 2014. Since that time, the BD3 capture plant has been operating at approximately 45 per cent capacity. " (Hansard: 26-Oct-2015; page 7466)
Substantial non-delivery penalty payments made by SaskPower to Cenovus
In the event SaskPower does not deliver the contractually committed volumes of carbon dioxide, it is obligated to make penalty payments to Cenovus.
"As SaskPower was unable to make up the shortfall product by 2014 year-end, Cenovus invoiced SaskPower for the penalty amount of $11,791,329.17 plus GST."
(Hansard: 26-Oct-2015; page 7466).
It is expected that for 2015 the late delivery penalties will be in the order of $5-million
(Hansard: 27-Oct-2015; page 7496).
Interpretation tends to fall into one of two camps;
What the NDP says
- The SaskParty and SaskPower misled the public by claiming that the facility was fully operational when it was not and when it knew there were significant outstanding engineering and design challenges.
- There is something fishy about SaskPower's $12-million (actual) and $5-million (expected) payment to Cenovus in 2014 and 2015 respectively.
The SaskParty's view
- For a $1.5-billion, technically sophisticated, world-first project the first year problems in commissioning, the design flaws and the late payment charges to Cenovus, are nothing out of the ordinary.
The answer, as is usually the case, is neither to the right nor to the left but somewhere in between.
The SaskParty is correct that design and commissioning problems are to be expected on a project of this size and complexity: particularly since it is a world-first.
The NDP is also correct that the SaskParty misled the public since, on the day the project was commissioned, and in numerous instances thereafter, SaskPower, Premier Wall and the Saskatchewan Government have implied that the project is fully operational and even performing better than expected. Subsequent facts have revealed these claims to be inaccurate and the parties concerned would have known this at the time.
It would appear that the NDP's take on things is winning the day. The public is upset that the Boundary Dam vision, painted by SaskPower and the SaskParty, was just that - a vision. The media coverage of the last week reveals that the public is now left wondering what else has been kept from them.
SO WHAT'S MISSING??
As it would happen there is a much bigger issue lurking beneath the surface. It was first raised more than a year ago in a Leader Post article by Murray Mandryk (disclosure: the data was from us).
Specifically - the economics of Boundary Dam suck and would do so even if the facility was operating exactly as it was intended to do.
To understand why it is necessary to break Boundary Dam into its two constituent projects:
- a coal-fired power station and
- a carbon capture facility.
The power station makes money and hence need not be considered further. However the Carbon Capture unit is a whole different ballgame.
The reality is that it is a $900-million (+ change) project which, every year for the next 30 years, generates an 'operating' loss of $4-million. Include the cost of borrowing and the final loss could be north of $2-billion. This is all summarised in the following table with an explanation below it;
Investment in & 30-year Cash Flows from, the Boundary Dam Carbon Capture Unit
Investment. The total investment is $917-million and that amount is not in dispute.
Revenues. Total revenue, from sales of carbon dioxide to Cenovus, is $23 per tonne, therefore $23-million annually or $690-million in total. This amount is also not in dispute.
The revenue from the sale of sulphuric acid is insignificant. Clarification: $23-million is a good chunk of change but is nonetheless insignificant in the scale of this project.
Parasitic Load. This is the electricity required to run the pumps, compressors and solvent regeneration processes etc etc needed to extract carbon dioxide from the power station exhaust gases. SaskPower has barely even mentioned this amount and no wonder.
The annual cost of electricity will be $18 million or $544-million over 30 years. In other words almost 80 percent of all revenue from the sale of Carbon Dioxide goes straight to pay the electricity bill. Yikes.
Operations and Maintenance. In industry jargon (engineers love an acronym) this is typically known as O&M. Again - no information has been provided by SaskPower and the matter has stayed under the radar. Fortunately Uncle Sam (the US Government) has provided a good estimate of CCS O&M costs which are just under $10-million annually or $294-million over the project life
Profits (or is that losses?). Adding the total revenues ($690+$23 = $713-million) to the total expenses ($544+$294 = $838) gives an Operating Loss of $125-million. Add this to the initial investment of $917-million, et voilà, a Loss before Interest of just over $1-billion ($1.042-billion to be exact). Include interest charges - which could easily be $1-billion - and suddenly the loss doubles.
Saskatchewan electricity consumers will be forced to pay for that loss through rate hikes and higher electricity prices. In fact, and as noted in this 24 August blog, we have already seen such rate hikes and more are likely.
To add insult to injury: the principal beneficiary of the Boundary Dam project is an Alberta-based oil company that will be making substantially more than $1-billion in profits from the scheme by virtue of using the carbon dioxide for Enhanced Oil Recovery.
For anyone wanting more on all of this (and I do mean much more) check out our detailed 99-page Boundary Dam analysis from March: it provides calculations, references and schematics in support of all the numbers.
SUMMARY & CONCLUSION
Last week's NDP revelations caused debate focused on various contentious issues related to Boundary Dam. Nonetheless the issues raised are not, given the $1.5-billion cost, of great financial significance. Their significance does however lie in the fact that they fundamentally altered public perception of this project.
SaskPower/the SaskParty had previously stifled debate on the merits of Boundary Dam by perpetuating the myth that it was fully functional and even operating better than initially expected. It is now clear that is not the case and also that the general public has been misled.
That the project proponents felt the need to do this over these relatively minor issues has, as revealed by last week's media commentary, caused the public to wonder what else is being hidden.
The answer is 'quite a bit'. There are substantial costs which have yet to be considered. They are;
- Parasitic Load/Cost of Electricity ($544-million)
- Operations and Maintenance charges ($294-million)
- Interest expenses (upwards of $1-billion)
Once they are included the economics of Boundary Dam CCS change from weak to seriously bad.
Electricity consumers of Saskatchewan are going to be liable for losses on this project of more than $1-billion and they will pay by way of higher electricity prices for many years to come. While they are doing that and to add insult to injury, the major beneficiary- Cenovus Energy: an oil company - will walk away with profits in excess of $1-billion.
The SaskParty hopes this is all going to blow over (pun intended). The reality is that it is just getting warmed up. The coming week promises to be interesting.