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Canadian Natural Resources Ltd. is betting against its oil patch peers with an investment in a new, climate-friendly refinery.

The energy company has formed a joint venture with North West Upgrading Inc., which is working to build a multibillion-dollar new bitumen refinery that transforms thick oil sands crude into diesel and sequesters the greenhouse gases produced by the process.

The move announced yesterday allows Canadian Natural to establish itself as a greener oil producer in the face of looming climate legislation, and comes as a boost to Alberta's efforts to create a carbon capture industry. But the company is also signing on to a new refinery at a time when refining margins have bled into losses and plants are closing across the continent.

And it's looking to build it in Alberta when most Canadian oil players have largely abandoned plans to process oil in favour of exporting raw crude to U.S. refineries that are starved for it.

"Everyone's kind of running away from upgrading and downstream and these guys kind of jump in and do this thing," said Raymond James analyst Justin Bouchard, who nonetheless doubts Canadian Natural will lose money on the deal - especially if refining profits pick up again in the future.

His conclusion: "I think more than anything it's just keeping their options open."

Financial details were not disclosed and Canadian Natural declined comment on the deal, which will also see it provide 25 per cent of the feedstock of the 50,000 barrel-per-day first phase of the North West refinery.

Two more similar phases are planned. Canadian Natural will take a 50-per-cent stake in the refinery, which North West will operate.

North West has already spent $400-million to develop the refinery, which would be the first of its kind to capture carbon and send it for sequestration along a pipeline that Enhance Energy Inc. has received government funding to build.

North West was also awarded $100-million in federal and provincial dollars to build the refinery, which will produce both diesel and a new feedstock for the petrochemical industry. If North West secures the bitumen volumes it needs, it could have the refinery in operation as early as 2013.

"What Canadian Natural sees with us is, first of all, we're making finished products and that's attractive - you don't have to rely on any downstream processing," said Ian MacGregor, chairman of both North West and Enhance.

"And we've got a very low carbon dioxide footprint. Nobody really knows how the legislation is going to play out, but you definitely have less risk if you have low CO{-2}, and this stuff has the lowest CO{-2} you can imagine."

Those who have studied the development of carbon capture and storage (CCS) said the deal is an important step for the nascent technology.

"It is a vote of confidence in CCS," said Robert Page, who chairs the National Round Table on the Environment and the Economy. "But what we really need is some hard figures from test facilities. ... The commercialization of CCS is still a long way away."

Construction of the refinery's first phase depends largely on North West's ability to secure volumes of bitumen from the Alberta government, which is working to collect its royalties in physical product that it can then process in the province, creating jobs. North West applied for a provincial contract on Wednesday.

CANADIAN NATURAL (CNQ)

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