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January 2009

Vol. 14, No. 4 Week of January 25, 2009

Coming face-to-face with bankruptcy

Gary Park

For Petroleum News

The Alberta oil sands are moving beyond delays and deferrals into the bankruptcy realm as insolvency experts warn there could be a parade of companies seeking creditor protection unless oil prices and the financial squeeze make a sudden recovery.

The first in line is BA Energy, the privately held developer of a heavy oil upgrader that was put on hold last September.

Unable to repay a C$50 million loan, BA, a wholly owned subsidiary of Value Creation, filed for bankruptcy and was scheduled in Alberta Court of Queen’s Bench on Jan. 16 when it suddenly halted the proceedings to make a fresh stab at negotiating a solution with its major lender, Credit Suisse.

Otherwise, BA would have pursued bankruptcy rather than face the recall of a US$507 million loan to Value along with the prospect of being forced to sell some assets as well as some of the extensive oil sands holdings of Value “at a price far below market value.”

Value holds 280,000 acres of oil sands leases and an estimated 12 billion barrels of recoverable bitumen.

The two companies, both created by entrepreneur Columba Yeung, have combined assets of C$768 million and BA holds tax pools of about C$588 million.

C$546 million invested

Before halting construction on its Heartland upgrader near Edmonton last September, BA had invested C$546 million on the project, designed to come onstream in three phases from 2009 to 2013 and eventually process 162,200 barrels per day of bitumen.

Value is seeking regulatory approval for its Terre de Grace oil sands project aiming to bring two 40,000 bpd phases into production in 2011 at a breakeven oil price of US$40 per barrel, generating some cash flow for the Heartland venture.

In the court filing, BA said it was “suffering from a cash flow shortage and as such will be unable to repay the (C$50 million loan).”

Meanwhile, Enbridge has stopped work on facilities linked to the upgrader, including an investment of C$100 million in six 150,000 barrel storage tanks, which were three-quarters completed. BA has reimbursed the pipeline company for the costs incurred and the return on investments.

Value Chief Financial Officer Ronnie Mo said the precipitous drop in oil prices and the global recession caught the entire oil sands sector off guard, forcing “virtually all” upgrader developers to shelve or defer projects.

Yeung said Value will now turn its attention to the Terre de Grace project to achieve some cash flow while looking for possible equity partners to revive the upgrader.

He said in a court document that TD Securities and Genuity Capital Markets have been hired to analyze the current market for oil and gas assets, Value’s upgrader technology and the size of the company’s oil sands holdings.

A spokesman for the Alberta Industrial Heartland Association, representing municipalities in the upgrader region, said the outlook for upgraders is gloomy now that the sector is turning its attention to extraction and away from the high-cost, high-risk upgrading business.

To date six of seven upgraders planned for Alberta have been stalled.

Neil Shell, executive director of the association, told the Edmonton Journal Alberta will miss its chance to build an upgrading industry if it fails to create a “level playing field” to discourage plans by oil sands producers to ship their bitumen to U.S. refineries, which are much cheaper to build and expand than those in Alberta’s inflation-driven economy.

The Alberta government recently set a goal of upgrading 75 percent of bitumen in the province, up from the current 60-65 percent, but the Canadian Association of Petroleum Producers forecast in a December report that those numbers could drop to 40 percent by 2015.

“Now we know we have to do something quickly,” he said. “The government has to turn this boat around.”

The Heartland group, working through a consultant, is studying a set of options from government incentives, taxes and royalties to investment in infrastructure and will work with an upgrader proponent to determine what result such changes might yield, Shelly said.

What’s next for other upgrader and oil sands related ventures is not clear, but a growing number of upstream companies — mostly juniors or those with international operations — are in various stages of filing for protection from creditors or asking lenders to extend debt maturity dates as they find the pathway to new equity or debt is closed.

Insolvency experts say a number of bankruptcy proceedings are in the works, but have yet to be made public.

They expect filings will soar because so many companies were able to raise capital during the period of robust oil and gas prices, building debt in the process.

If there is a rush to court it will likely be led by juniors and service sector companies, say restructuring advisors.






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