Oil sands projects face credit concerns

Standard & Poor’s says capital costs could put stress on balance sheets, but thinks takeovers of producers a ‘viable possibility’

Gary Park

For Petroleum News

Galloping costs at some of Alberta’s integrated oil sands mining projects are setting off alarm bells at Standard & Poor’s, but not enough for the powerful rating agency to suggest that takeover activity by international (notably U.S.) companies will fade.

Because the list of projects scheduled for completion by 2015 has ballooned from C$30 billion to C$115 billion there is unease in the credit sector about the costs associated with launching and completing the ventures, said Michelle Dathorne, S&P’s director of utilities, energy and project finance.

She said that although the long-term credit profiles for oil sands developers have strong potential, the near-term costs are a source of “very real concern” from S&P’s perspective.

In addition to the projected capital costs, S&P pays close attention to rising labor costs to get a more specific fix on the part labor plays in cost inflation.

Ratings by S&P and Moody’s have a major consequence on a company’s ability to borrow from commercial lenders and its ability to issue corporate bonds at favorable rates.

Dathorne told a Calgary briefing that although there is “likely to be some stress on the balance sheet,” the oil pricing outlook provides some latitude to “add a little bit of debt without compromising the financial profile.”

Citing one example, she said S&P gave Canadian Natural Resources a negative rating when the independent said it would not recruit partners for its Horizon mega-project.

Dathorne said the Horizon costs, budgeted at about C$10.8 billion for the current phase, were a source of unease, although the fact that Canadian Natural has adopted a price hedging strategy tempered the rating decision.

She said rising global interest in the oil sands deposits points to takeovers of producers as a “viable possibility.”

Although there has not been a substantial amount of U.S. investment in Canada’s petroleum industry for several years, there is “no reason why you should not see large caps — majors and independents — looking at the oil sands as a source of incremental resource growth,” Dathorne said.

She said northern Alberta represents a “nice, stable, secure, long-term source of oil,” but she declined to identify potential targets.

Major players may turn to oil sands

BP has added weight to speculation that it is gearing up for a larger oil sands role as it seeks 300,000 barrels per day of Canadian heavy crude — in addition to the 150,000 bpd it already processes — to feed its refineries in the northern U.S. as part of a plan to invest US$3 billion converting three of those facilities.

EnCana, having ruled out building its own upgrader in Alberta, is seen by many observers as a likely partner as the large independent hunts for ways to upgrade the 500,000 bpd it hopes to produce from the oil sands by 2015.

BP Canada Energy Chief Executive Officer Brian Frank told the Financial Post that his company is focused for now on a strategy of accessing supplies contractually rather than taking an upstream position, but he did concede that “anything is possible.”

BP is one of the few that recognizes only oil sands projects under actual development in calculating world-wide energy reserves.

McMahon told Bloomberg News that all of the companies he listed could be among 15 bidders interested in teaming up with EnCana.

Meanwhile, delegates to a world energy forum in Quebec were told that Canada could become a world energy superpower if it adopts a clear policy to develop and sell technologies covering the entire energy supply chain.

Ken McCready, senior policy adviser for the Energy Council of Canada, said a policy framework could be instrumental in making Canada a “sustainable energy super power.”

Council president Murray Stewart said the hydroelectric and wind energy in Quebec, oil sands in Alberta, hydroelectric and natural gas in the North and Maritimes, and uranium in Saskatchewan are the basis for an “energy prosperity ... if we develop this properly.”