Irving, BP scrap plans for Canadian refinery

Irving Oil Ltd and BP Plc said on Friday they will not proceed with plans for an C$8 billion ($7.4bn) oil refinery in New Brunswick, citing the recession and dwindling North American fuel demand.

Irving and BP were studying the feasibility of a second, 300,000 barrel a day plant in Saint John, possibly to be built in two phases, to boost gasoline supplies in the US Northeast.

But profit margins have been squeezed and spare oil processing capacity has grown in Canada and the United States with the economic downturn.

"The world changed last year when the economic crisis hit. We saw demand for our product fall off for the first time in many years, and demand forecasts for petroleum products declined," Kevin Scott, director of refining growth for Irving, told reporters.

"We saw many energy projects delayed or scaled back or canceled. We saw studies predicting that 80 per cent of refining projects being considered wouldn't go ahead, and those that did would be funded by state-owned oil companies."

Family-owned Irving, which already runs Canada's biggest refinery in the East Coast city, first made plans for its Eider Rock refinery public in October 2006. BP, the British oil major, joined in the feasibility study in March 2008.

The companies spent "tens of millions of dollars" studying the viability of the project and conducting engineering and design work, Scott said.

The decision is not surprising, given conditions in the industry, said Mike Ervin, president of refining and marketing consultants MJ Ervin & Associates.

"I think it would be foolhardy to make investments of that nature now. There's a good million barrels a day of idle capacity," he said. "To invest billions of dollars into more capacity would only serve to ensure that future crack spreads remain weak."

The move marks the third cancellation or delay of refining projects in Atlantic Canada in the past year. Harvest Energy Trust has deferred a C$2bn expansion of its Come-by-Chance plant in Newfoundland, and plans by Newfoundland and Labrador Refining Corp for a new facility were stalled by the credit crunch.

Elsewhere in Canada, Royal Dutch Shell canceled plans for a major refinery in southern Ontario last year, and said this month it may close or sell its 76-year-old Montreal plant.

Irving is still pursuing other energy opportunities in Atlantic Canada, Scott said. This year, the company opened the country's first LNG terminal in partnership with Spain's Repsol.

It is also looking at exporting gas-fired electricity to New England and weighing the potential for wind and tidal power, he said.