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Chavez ripples head north Venezuelan strongman’s policies give Exxon reason to expand in Alberta Gary Park For Petroleum News
The turmoil in Venezuela, as President Hugo Chavez moves to nationalize heavy oil ventures in the Orinoco Belt, could send some positive ripples in Alberta’s direction.
ExxonMobil, having decided to pull up stakes entirely in Venezuela, may now decide to take a major plunge into the oil sands, said Fred Cedoz, vice president of GWEST, a Washington-based energy consulting firm.
He told the Financial Post that the choice for ExxonMobil is simple: “Where would they rather be: In a spot like Venezuela where you have to continue to negotiate away your position and give away your return to your shareholders, or do you want to be in a place like Canada, where you know that the government might change, but you are not going to have resources nationalized?”
Through its wholly owned Canadian subsidiary, ExxonMobil has a minority stake in the planned 300,000 barrels-per-day Kearl Lake oil sands project, which could come onstream as early as 2010.
Imperial Oil, its sister company that is 69.6 percent owned by ExxonMobil, is already a major player. It owns the 150,000 bpd Cold Lake heavy oil project and has a 25 percent holding in the 350,000 bpd Syncrude Canada consortium.
ExxonMobil expertise could be applied in Alberta Although ExxonMobil will lose only 48,000 bpd of Orinoco production, it has accumulated knowledge and expertise in heavy oil deposits that could be applied in Alberta — the only other current global opportunity that could quickly replace its Venezuelan reserves.
The other majors expected to exit Venezuela are ConocoPhillips, Chevron, Statoil, Total and BP — all of them except BP involved in large-scale undertakings in Alberta.
For now, ExxonMobil and ConocoPhillips have rejected Venezuela’s compensation offers and are expected to launch big arbitration claims for the loss of assets that are part of four upgrading facilities capable of producing 600,000 bpd.
The biggest loser is ConocoPhillips, which is walking away from 1.1 billion barrels of reserves and 82,000 bpd of output as well as turning over to state-owed PDVSA its 32.5 percent stake in an undeveloped offshore gas/condensate project.
Petro-Canada, the only Canadian company with interests in Venezuela, said it has negotiated an exiting agreement in principle with the Venezuelan authorities.
But it will not discuss the details until a deal is finalized.
Statoil, without making any direct links with the Venezuelan situation, sees Alberta as a key component of its global expansion.
Having concluded a C$2.2 billion takeover of North American Oil Sands and put itself at the controls of a possible 200,000 bpd project, the Norwegian major is ready to invest as much as US$15 billion by 2020, said newly appointed Statoil Canada Chief Executive Officer Geir Jossang.
He said “there is no doubt that in our international portfolio (the Alberta oil sands represent) a very important and high-profile” undertaking, regardless of the potential increase in royalties.
Jossang said he is confident that any royalty revisions will not undermine the oil sands’ appeal to foreign investors.
There are uncertainties in Alberta However, the political stability in Alberta is offset by a growing basket of uncertainties — the costs of meeting new environmental regulations; whether the Alberta government will hike oil sands royalties; the extreme pressures of labor shortages which are spawning threats of strikes by trade unions; and the unease over rising breakeven costs of oil sands mining projects.
The first wave of environmental costs took effect July 1 when industrial emitters of more than 100,000 metric tons of greenhouse gases a year were required to reduce their emissions intensity by 12 percent or face penalties the provincial government estimates could total C$177 million a year.
For now, most companies are trying to calculate the actual cost, which is tied to a 2003-05 baseline of GHG emissions.
They are also unsure what to expect this fall when the government releases a new climate change plan that will take into account issues such as technology investment, energy efficiency and conservation.
The labor costs are a far greater concern, with six building trades unions representing 25,000 workers taking strike votes that could stop work on two major projects and could spill over to existing operations.
Electricians, boilermakers, plumbers, pipefitters, millwrights and refrigeration mechanics in Calgary, Edmonton and Fort McMurray are holding the strike votes in response to rampant inflation, especially in the oil sands region, where average house prices are now C$550,000.
The unions want wage increases and protection against the soaring costs of living.
The electricians’ union has already turned down offers of annual wage increases of 5 percent, 6.5 percent, 6.5 percent and 6.5 percent over the next four years, demanding instead one of three options: a two-year contract; a four-year pact with higher wage hikes in the last two years; or a four-year agreement that would allow either side to renegotiate wages in the last two years.
Barry Salmon, a spokesman for a “confederation” of unions, who broke away from the traditional practice of the Alberta Building Trades Council of negotiating a master contract with employers, said his union is anxious to receive a strike mandate, but would prefer a settled contract.
He said strike action would affect two projects — Long Lake, a joint venture by Nexen and OPTI Canada and Horizon, by Canadian Natural Resources.
Analysts see oil sands economics challenged Mark Friesen, an analyst at FirstEnergy Capital, said in a note to clients that union troubles, GHG regulations and the prospect of higher oil sands royalties are posing serious challenges to oil sands economics.
He cautioned regulators and unions to steer away from any actions that could “kill the goose that lays the golden egg.”
Noting that labor accounts for about one-third of capital project costs, Friesen said a 5 percent annual wage hike over three years would boost project budgets by another 5 percent.
In a new report, U.S. investment bank Friedman, Billings, Ramsey Group estimated the costs of oil sands mining projects have increased by 16 percent in the past year to US$54 per barrel West Texas Intermediate, although steam-injection operations have risen by only US$2.50 per barrel over the last 12 months to US$30 per barrel.
The FBRG report made no attempt to calculate the costs of upgraders, which turn raw bitumen into refinery-ready crude, other than noting those facilities represent about 45 percent of the total cost of integrated upstream and downstream projects.
The clearest indication yet of the mounting operational costs came from Suncor Energy, the No. 2 oil sands producers after Syncrude Canada, which has signed a three-year contract with 2,400 employees (or 60 percent of the facility’s workforce) including a 19 percent pay hike and cash signing bonuses of C$4,000.
The pay increases will start at 7 percent this year, followed by 6 percent in both 2008 and 2009, and affect 15 occupational groups from maintenance groups to heavy equipment operators earning from C$25.53 to C$43.94 per hour.
The pact also offers stock options for long service in all sectors of the operation.
A union spokesman Don Drummond would not concede that the terms were “exceptional,” but said working conditions were at least as important as the size of pay checks.
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