Alcan has announced that it plans to invest $2 billion to upgrade its Kitimat smelter with modern and more efficient technology.
August 14, 2006
Vancouver - Alcan's announcement that it plans to invest $2 billion to upgrade its Kitimat smelter with modern and more efficient technology highlights B.C.'s international competitiveness, and this investment will serve as an important basis for continued economic prosperity in B.C.'s Northwest, Premier Gordon Campbell said today.
"The aluminum sector is a highly competitive, global business. With this investment, Alcan has sent a clear message that they believe B.C. is a critical part of the company's future and success," said Campbell. "This is more than just an investment; it's a major vote of confidence in the people of Kitimat, the future of the Northwest, and recognition of the strength of B.C.'s investment climate."
Alcan has undertaken a comprehensive review of its international operations.
As part of this review, Alcan could have focused its capital investments in other international locations and continued with the status quo operations at Kitimat until the smelter reached its scheduled shutdown in about a decade. However, after considering the options, Alcan has chosen to revitalize its B.C. presence by investing $2 billion to modernize the Kitimat smelter. This modernization will increase the smelter's output while reducing greenhouse gas emissions and providing a stable energy supply to BC Hydro.
The modernization is expected to ensure approximately 1,000 jobs remain in Kitimat for at least the next 35 years, while creating more than 800-1,000 construction and other jobs over a five-year period. Importantly, the energy requirements of the modernized smelter have allowed for the 1997 Replacement Electricity Supply Agreement to be extinguished, thereby removing a significant potential liability of the Province to provide power to Alcan at below market prices.
As part of its future plans for Kitimat, Alcan and BC Hydro have agreed to amend and extend a power purchase agreement that will see BC Hydro buy power in excess of Alcan's smelter needs to meet the needs of BC Hydro customers.
This agreement will help address the growing gap between the amount of electricity the province is consuming versus the amount being produced in the province. The terms of the agreement will be put into a formal agreement over the coming weeks, to be approved by government and Alcan's board. The power purchase agreement is subject to BC Utilities Commission review and approval.
"Alcan has been a valued partner in the growth of our province for over 50 years and will continue to build on that legacy with this major investment in Kitimat," said Campbell. "I want to thank Alcan for its continued commitment to B.C. and for working with its partners to make this investment possible for the benefit of the entire Northwest.
"Combined with two major, billion-dollar-plus pipeline projects, a $500-million LNG plant and a potential break-bulk port expansion, the Northwest is becoming a resource and transportation powerhouse for not only B.C., but the entire country."
Backgrounder
Alcan Investment In Kitimat
History of Alcan in B.C.
Alcan has operated for 104 years in Canada, including more than 50 years in northwestern British Columbia. Over the past decade, Alcan's international presence has grown substantially as consolidation and smelter expansions have occurred throughout the aluminum sector. The company is incorporated and headquartered in Canada.
For the past 52 years, Alcan has contributed to the development of B.C.'s northwest region by producing and selling value-added aluminum products in the growing Pacific Rim market. Alcan's Kitimat smelter contributes approximately $500 million annually to the Canadian economy, of which more than $268 million is spent in British Columbia, and it is estimated that over $200 million stays in Northern B.C. In developing and operating the Kitimat-Kemano project, Alcan has invested the equivalent in today's dollars of about $5 billion, one of the largest private capital investments in B.C.'s history.
Alcan is one of the largest private sector employers in the Kitimat-Terrace area and enjoys many successful partnerships with First Nations, governments and businesses in the region.
Kitimat Modernization
Alcan has chosen to remain in B.C. as a result of B.C.'s superior investment climate and has signalled that the company will be investing $2 billion to upgrade the Kitimat smelter using modern and more efficient technology. The smelter modernization in Kitimat will create more than 800-1,000 construction and other jobs over a five-year period and secure approximately 1,000 long-term, high paying jobs in the Northwest region for the next 35+ years.
As a result of significant productivity gains from the application of new technologies to the Kitimat smelter, there will be a transition of employment levels from the current 1,500 to 1,000 jobs. Alcan will continue to work diligently with businesses and First Nations in the region to stimulate new job creation through economic development and diversification as well as in leveraging the smelter modernization to create new opportunities. Alcan believes that the transition can be made without layoffs.
Over the short term, the economic activity generated by the construction phase of the project is expected to create significant additional employment opportunities. Additionally, under the amended and extended power purchase agreement, smelter curtailments are expected to decline, creating greater job stability in the community.
The modernized smelter will use the latest aluminum smelting technology, making Kitimat one of the most cost-efficient and environmentally friendly smelters in the world. The latest evolution of Alcan's leading AP technology will be used in the Kitimat modernization. The benefits of this technology include:
- Increased productivity - production capacity will increase by over 40 per cent from its current levels (275,000 tonnes per year to 400,000 tonnes per year) and actual production is expected to increase by 60 per cent from current levels. This will increase Alcan's global production by over four per cent from its current capacity of 3.5 million tonnes per year.
- Significantly lower greenhouse gas emissions - by an expected 70 per cent. As well, fluoride emissions are significantly reduced using this technology.
- Greater efficiency - as a more efficient smelter, the Kitimat modernization also allows Alcan to enter into a mutually beneficial amendment and extension of a power purchase agreement with BC Hydro.
Backgrounder
Power Purchase Agreement
History
In 1950, the Province and Alcan Aluminum Ltd. signed an agreement (the 1950
Agreement) allowing Alcan to divert water out of the Nechako watershed to generate hydroelectric power at the Kemano Generating Station. Alcan relies on Kemano to supply the aluminum smelter at Kitimat.
Under current operations, approximately 75 per cent of all Kemano power is for the Alcan smelter in Kitimat. After the smelter modernization is completed, virtually all the firm energy from Kemano will be committed to the upgraded Kitimat smelter, with 'smelter first' provisions to ensure fewer production curtailments. All surplus power will be sold to BC Hydro to supply electricity to Kitimat business, residences, and other communities.
Alcan's Kemano power station is the only major power facility in northwestern B.C. and has been an important resource for BC Hydro for over 50 years. Alcan has sold power that is surplus to its smelter requirements since the 1950s when the area was tied into BC Hydro's power grid. Going back to 1992, Alcan, on average, has used approximately 75 per cent of Kemano power for the smelter and approximately 25 per cent has been sold.
All the surplus power Alcan currently sells is purchased by BC Hydro under a long-term agreement and, depending on water and market conditions, by BC Hydro's wholly-owned subsidiary, Powerex. These purchases benefit all B.C.
ratepayers, including the neighbouring communities from Prince Rupert to Vanderhoof that utilize this electricity.
In 1997, the previous government negotiated a power agreement with Alcan, the Replacement Electricity Supply Agreement, which could have required the province to provide electricity at prices less than the cost of production, if Alcan constructed a new smelter that required more power than is produced at Kemano. With the smelter Alcan is proposing to build, this power will not be required and taxpayers will no longer be exposed to this potential expense, which was estimated in the hundreds of millions of dollars.
The Power Purchase Agreement
To help meet B.C.'s growing electricity needs, Alcan and BC Hydro have agreed to amend and extend an existing power purchase agreement - the Long Term Electricity Purchase Agreement (LTEPA) - so that BC Hydro will have access to power in excess of Alcan's smelter needs. Under this commercial agreement, while the smelter modernization is occurring, an additional firm power quantity of 30 MW will be available for purchase by BC Hydro, resulting in a total of 170 MW, to be delivered from 2007 to 2009; and 80 to 120 MW of power to be delivered between 2010 and 2014 - all at competitive pricing. This will assist in filling an immediate gap between electricity supply and demand, reducing BC Hydro's reliance on imports. Meeting this immediate need is particularly important, with much of the new electricity supply from the contracts awarded under the recent Open Call for Power projects, not expected to come online until 2010.
BC Hydro also gains access to any additional, non firm power supply beyond the smelter needs, at the existing, attractive LTEPA price until 2014, after which the supply will be available at a fixed, competitive, market-based price until at least 2024. BC Hydro also achieves scheduling rights that allow them to make use of the flexibility of the Kemano project to maximize benefits to ratepayers.
In return for Alcan supplying an additional 30 MW of firm energy from 2007 to 2009, and partially reinstating power it had recalled for the period 2010 to 2014, Alcan will receive two lump-sum payments. The $45 million payable at closing in 2007 and $66 million payable in 2011 represent the differences between the prices in the existing agreement and the mid-range pricing resulting from the awarded contracts in BC Hydro's 2006 Open Call for Power.
Prices under the existing contract will continue until 2014, and will move to a fixed, market-based price from 2015 to 2024.
This agreement, combined with recently announced purchases from independent power producers, are important steps to meeting the growing demand for power, but more is still needed. BC Hydro is continuing its plans for the
2007 and 2009 Open Calls for Power to purchase new electricity requirements from independent power producers, and continues to investigate other supply options.
The terms and conditions of the reinstated agreement must be approved by the BC Utilities Commission.
