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Little leaguers swing big bats Teck Cominco, UTS roll out plans for oil sands mines that could generate output of 210,000 bpd by 2015, acknowledge obstacles Gary Park For Petroleum News
Regardless of clouds that persistently hang over the Alberta oil sands, there’s no shortage of risk-takers among the region’s players.
Canadian mining giant Teck Cominco and Oil sands start-up UTS Energy — each 20 percent partners in Petro-Canada’s planned Fort Hills operation — are the latest to toss their hats into the ring, unveiling plans for two mines that could cost at least C$12 billion.
In going head-to-head with more experienced majors at a time of severe capital cost pressures and uncertainties over pending federal legislation to curb greenhouse gas emissions, the two companies seem unafraid of playing in the big leagues.
Their plans call for a 50,000-barrel-per-day Equinox project to come on stream in 2014 and a 100,000-160,000 bpd Frontier project to start bitumen production in 2015.
Based on some of the most recent cost breakdowns, Equinox would cost about C$2.5 billion, while Frontier would come close to C$10 billion.
Final cost estimates won’t be known until later this year for Equinox and a year later for Frontier.
Environmental challenge Executives of the two partners concede the environmental impact of the oil sands may be the toughest challenge they have to overcome, along with securing financing.
UTS Chief Executive Officer Will Roach conceded there is an intense focus on the oil sands by environmentalists and governments in Canada, the United States and globally.
Teck Senior Vice President Doug Horswill said the environmental issue will be “addressed fully and completely.”
Roach said UTS is examining the feasibility of building and operating a “carbon neutral” mine, which could involve using equipment that reduces carbon dioxide emissions by replacing massive trucks to haul bitumen to a processing plant with technology that allows the mining operation to occur at the site.
He said technologies being explored include facilities to capture and store CO2, conversion of “bottom-of-the-barrel” crude into a fuel to replace natural gas, and methods to reduce the use of water.
Financing also an issue On the financing front, UTS is still short of C$1.6 billion to cover its share of Fort Hills first phase.
The company’s Chief Financial Officer Wayne Bobye said it is hoped the squeeze on debt markets will ease by the time that money is due in late 2009.
Otherwise, he indicated UTS — which has no cash flow from oil sands production — might reluctantly be forced to sell assets as it has done over the last year to boost its 2007 profits to C$137.37 million from C$6.5 million in 2006.
What Roach has no doubt about is the extent and quality of the UTS resources, noting that “extensive exploration programs over the last three years have identified the presence of significant quantities of mineable oil sands.”
The Frontier leases have an estimated 2 billion-2.8 billion barrels of recoverable bitumen and Equinox is estimated at 380 million barrels. Further exploration and delineation drilling is expected to boost those numbers.
Roach said the resource can support long-term projects, with Frontier a candidate to grow beyond the currently projected upper limit of 160,000 bpd and have an operating life of 40 to 60 years.
UTS resilient The resilience of UTS is not in question. It started out solo on Fort Hills, realized it couldn’t see the project through to completion so brought Petro-Canada in as operator, reviving what looked like a dead project.
It has stared at rock bottom, with shares trading under C$1 in 2003, before breaking through C$7 in 2006 and settling back to the C$5-$6 range over the last nine months, giving UTS a current market value of about C$2.3 billion, up six fold from four years ago.
Roach described that as a “remarkable transformation,” and boldly forecast that the valuation could climb to C$30 billion in 15 years, as cash flow supports each incremental growth phase.
A major unresolved matter for the two projects is how the bitumen will be upgraded and refined.
To date neither plan includes upgraders, considered the most inflationary aspect of oil sands development.
Bobye said the raw bitumen could be shipped to the Fort Hills complex, which is expected to have an upgrader, or as far afield as refineries in the United States.
He hinted UTS might also be open to forming a partnership, along the lines of the EnCana-ConocoPhillips and Husky Energy-BP deals, which have teamed up producers and refiners in joint-venture arrangements.
Meanwhile, UTS and Teck have a full plate as the 190,000 bpd Fort Hills project advances to pivotal decision-making stages.
UTS said front-end engineering and design is due for completion by mid-2008, further nailing down cost estimates, currently at C$15.2 billion and allowing corporate sanctioning. Production is scheduled to start in 2015.
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