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May 2009

Vol. 14, No. 19 Week of May 10, 2009

Imperial, TransCanada leading the charge

Companies take bold view of oil sands, while others rescope plans, rethink strategies; not fazed by Obama’s environmental policies

Gary Park

For Petroleum News

Imperial Oil and TransCanada, key players in the Mackenzie Gas Project, are also emerging as key proponents of future oil sands development.

Imperial Chief Executive Officer Bruce March has dropped the clearest hint yet that his company is on the verge of announcing corporate approval of the 300,000-barrel-per-day Kearl venture (a joint undertaking with sister company ExxonMobil Canada).

Almost simultaneously, TransCanada CEO Hal Kvisle told reporters May 1 that his company — having already entered the realm of nuclear, thermal and wind power generation — is ready, willing and able to extend its reach beyond its traditional role as Canada’s largest regulated natural gas pipeline operator into delivering production from the Alberta oil sands to North American markets.

For March, a decision to proceed with Kearl would fly in the face of those who believe U.S. President Barack Obama is about to lead the charge on climate change and greenhouse gas emissions measures that could undermine imports of Canada’s oil sands crude.

He said there is “no doubt that the U.S. is going to take action” on the environmental front.

“Just like Canada, they’re going to develop a climate change policy. … We are staying in tune with what those elements are going to be and it looks like the Obama administration is 100 percent committed” to a cap-and-trade system for carbon.

But March draws optimism from Obama’s visit to Ottawa in February when he sidestepped the chance to characterize Alberta’s oil sands output as “dirty” oil.

Instead the president said Canada “has got a challenge with the oil sands (in the same way) the U.S. has a challenge with coal-fired electricity generation,” he said.

March is doubtful the U.S. Congress will introduce climate-change legislation in the near term, predicting that process in both the House of Representatives and the Senate is likely to take much longer than most people expect.

Kearl to be funded

The Kearl project was initially targeted to come on stream in 2012 at 100,000 bpd and grow in two more similar phases at a cost last pegged in the range of C$5 billion to C$8 billion, not including an upgrader.

“You can assume we’re going forward with the project and that we’ll fully fund it before the end of the second quarter,” March said.

Imperial has used the last eight months to “push as much cost out of the project as we possibly can and it’s been very successful,” he said, repeating similar sentiments expressed in April by Petro-Canada CEO Ron Brenneman.

March said the cost containment will continue until a proposal is ready for Imperial’s board of directors, likely within two months.

However, he was not prepared to offer even the vaguest indication of a new budget.

“We do want to go forwards with this project and we want to keep it roughly in the same time frame,” he said.

He said the cost squeeze involves negotiations with service providers and delays in ordering equipment.

But Imperial did not cancel a single contract, because it believes in the “sanctity” of those deals, he said.

Kvisle said that in addition to launching its US$12 billion Keystone pipeline from the oil sands to the U.S., TransCanada is “very happy” to consider any other proposals “if commercial terms are right and there are large-scale crude oil opportunities that come available, probably as a result of (oil sands) development and increased production there.”

“If we were to become larger in the crude oil business than the natural gas business, that would be OK,” he said.

Keystone is designed to eventually carry 1.1 million bpd to refineries in the U.S. Midwest and Gulf Coast, starting with the US$5.2 billion first phase to Wood River, Illinois, that is due to start operations no later than early 2010.

Williams to build

In other oil sands developments:

• Oklahoma-based Williams said it plans to build a 250-mile pipeline in the heart of the oil sands region. The planned US$283 million line would ship natural gas liquids and olefins from the company’s extraction plant at Fort McMurray to its Redwater processing facility near Edmonton. Construction is planned to start in 2010, with an anticipated in-service date of spring 2012, with an initial capacity of 43,000 bpd of off-gas liquids.

• Canadian Oil Sands Trust, which has a 37 percent stake in the giant Syncrude Canada operation, is likely to become a conventional public corporation before new Canadian government tax rules affecting income and royalty trusts take effect in 2011. Under the legislation, conversion does not trigger negative tax implications for trust unit holders. Canadian Oil Sands reported an 86 percent slide in first-quarter earnings to C$43 million, or 9 cents per unit, because of low oil prices, compared with a profit of C$298 million, or 62 cents per unit, a year earlier.

Merchant upgrader in works

• California-based Ivanhoe Energy, whose share price has soared about 250 percent this year, said its proprietary oil sands upgrading technology has resulted in the successful processing of bitumen from Alberta at its feedstock test facility in Texas, reinforcing the economic case for its planned 50,000 bpd Tamarack project in Alberta. A company spokesman said the technology had previously yielded promising results at a commercial demonstration facility in California and at a pilot project in Ottawa. Ivanhoe estimates the process could generate double-digit returns with oil prices at US$70 per barrel because it produces lighter, more valuable crude along with byproduct energy that can be used to generate steam or electricity. It hopes to apply for regulatory approval by mid-2010.

• North West Upgrading, after joining the oil sands slowdown, said it may start construction later this year in the initial phase of its 231,000 bpd merchant upgrader near Edmonton, setting its sights on a late 2012 completion. Ian MacGregor, chairman of the privately held company, said North West has “money in the bank and has been working away,” including hiring some quality employees. He said the key is the Alberta government’s planned bitumen royalty-in-kind program that will make the province’s share of raw bitumen available to any companies building upgraders in the province. “If we can provide the option for the province to make a lot more money (from the value-added end of the oil sands business) and we get a good contract, we’ll be able to finance off it,” he said.






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