August 12, 2008 / 1:42 PM / in 9 years

Harvest mulls C$2 billion Newfoundland refinery project

TORONTO (Reuters) - Harvest Energy Trust HTE_u.TO is considering a C$2 billion ($1.9 billion) expansion of its Newfoundland oil refinery, a project that would boost output by 65 percent, the company said.

But Calgary, Alberta-based Harvest stressed on Tuesday it won’t go ahead with the major project unless it can attract a partner to share the costs. It has already started a process to find one.

Harvest said SNC-Lavalin SNC.TO, the engineering firm it hired to study expansion alternatives for the Come-By-Chance plant, has recommended an increase of production capacity to 190,000 barrels a day from 115,000.

The project would include installing a delayed coking unit, retooling existing gear and adding new equipment to allow the plant to process heavier and more sour grades of crude.

Harvest, which has run Canada’s easternmost refinery for nearly two years, described the projected return on such an investment as compelling, despite the hefty price.

In February, it had forecast costs for upgrading the plant at more than C$1 billion. Harvest had also said previously that capacity could be expanded to 155,000 barrels a day or more.

Its next steps before making a go-ahead decision include a more detailed evaluation of the engineering firm’s data, a study of financing options and identification of potential partners in the development, it said. That could take about a year.

“We’ve just initiated a process to go out and respond to people who have proactively approached us over the last couple years as they’ve became familiar with this opportunity,” Harvest Chief Executive John Zahary told analysts.

“Now that we’ve finalized the engineering study we’ve decided to go out to them and solicit proposals.”

A possible outcome is an investor contributing to the expansion cost to gain an stake in the overall plant, he said.

“So we would own a smaller share of a larger facility ... which we think would be a much better value opportunity for shareholders,” Zahary said.

The focus on financing and partners is key for Harvest, which does not have the financial wherewithal to undertake such a large project on its own, said Jill Angevine, analyst at FirstEnergy Capital Corp.

The refinery was built in 1971, and has changed hands several times, at times sitting idle. Harvest, which was best known for its Western Canadian oil operations, bought it from Dutch trading firm Vitol for C$1.6 billion in late 2006.

Harvest’s is not the only refinery project on the drawing board on Canada’s East Coast.

Nearby, Newfoundland and Labrador Refining Corp has proposed a $4.6 billion plant to process 300,000 barrels a day, although its efforts have been hampered by difficulties attracting financing amid the credit crunch.

It won protection from creditors in June, allowing it to devise a restructuring plan.

In New Brunswick, Irving Oil Ltd is planning a C$7 billion, 300,000-barrel-a-day refinery that would double capacity.

Harvest’s second-quarter results showed some impact of weak refining-industry conditions. It recorded a net loss of C$162 million, or C$1.07 a unit, down from a year-earlier profit of C$6.2 million, or 5 Canadian cents a unit.

The latest quarter included a C$305 million noncash charge tied to the value of its forward oil and gas sales contracts.

Operating cash flow in refining was just above break-even at C$1.3 million, as margins contracted by 64 percent.

Harvest trust units were up 35 Canadian cents, or 2 percent, at C$19.80 on the Toronto Stock Exchange on Tuesday afternoon.

($1=$1.06 Canadian)

Editing by Bernadette Baum; Editing by Peter Galloway

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