by Dave Cooper, EdmontonJournal.com, July 28, 2010

EDMONTON — The Alberta government gave the green light Tuesday for detailed talks to proceed with North West Upgrading to handle provincial royalty bitumen, and likely allow the firm and partner CNRL to build a $5-billion facility near Redwater.

Energy Minister Ron Liepert said a contract could be signed by early fall. If that happens, construction will start next spring, with about 8,000 workers needed -- including work at the site in related manufacturing.

The Tory caucus agreed Tuesday with a cabinet decision the day before to accept an agreement in principle with the firm.

"We have agreed on a term sheet, and it has been approved, so now we will proceed with negotiations. This bodes well for the future of the project," Liepert said in an interview.

"This is all part of the negotiations. You had to agree within this scope of how we are going to get to an agreement, because without agreeing on these general principles there wouldn't be a deal."

The province selected North West Upgrading's project in May. The first phase of the three-phase project will see the upgrader handle 50,000 barrels of bitumen a day.

The upgrader would get most of its supply through the new Bitumen Royalty in Kind (BRIK) initiative, under which Alberta will begin to take its share of royalties in bitumen rather than cash, which it can then make available for upgrading in a move to encourage value-added production in the province.

Neil Shelly, executive director of the Heartland Association, a collection of local municipalities that includes Edmonton, said after North West was chosen in May that the move was "the most significant good news in three years" for his region.

Liepert has said the commercial conditions for processing the government's bitumen must make business sense.

"The whole intent (of BRIK) is to get as much value-added as we can. But as a provincial government we have to look at this as a business opportunity, not a make-work project," he said at the time.

"North West is not going to invest $5 billion in an upgrader if they aren't going to make money on it, too."

North West chairman Ian MacGregor has said the 75,000 barrels per day under BRIK and the 25,000 bpd coming from partner Canadian Natural Resources will be enough for the first two phases of the three-phase joint-venture project.

"We'll have two good customers, the province and CNRL. And we'll help them market the diesel fuel," he said after his firm was selected.

North West has about six months more engineering work to do on the upgrader. Using a gasifier instead of a coker, the plant will produce a pure stream of 3,500 tonnes a day of carbon dioxide that will feed into the Enhance Energy's pipeline that will move the CO2 to central Alberta for enhanced oil recovery.