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Total plans in tatters Extends list of shelved projects by adding oil sands mine to upgrader, blaming surge in capital costs; production could start in 2022 Gary Park For Petroleum News
The Canadian unit of French energy giant Total was brimming with optimism when it created waves in the oil sands just over three years ago by forming a partnership with Suncor Energy, the sector’s powerhouse.
Together, Total and Suncor, with some junior partners, were to sink tens of billions of dollars into oil sands development over the next decade, building two mines with combined output of 260,000 barrels per day and a plant to upgrade almost 300,000 bpd of crude bitumen.
Right now the grand dreams are in ruins, despite oil prices hovering around US$100 per barrel, which would once have caused an industry stampede into northern Alberta.
The final domino fell May 29 when Total, as operator, put the joint venture’s C$11 billion Joslyn mine on hold indefinitely, blaming rising costs that it said made the project financially untenable.
Total has already discovered the perils of the oil sands when plans for the C$11.6 billion Voyageur upgrader were cancelled, forcing the company to book a loss of US$1.65 billion and to sell its 49 percent stake to Suncor for a paltry C$500 million.
Clouds also hang over the C$13.2 billion Fort Hills mine, led by Suncor, with Total controlling a 38.25 percent stake.
That project - with Occidental Petroleum owning 15 percent and Japan’s Inpex at 10 percent - is widely viewed as more financially attractive than Joslyn and is still in the development phase.
When the partnership was launched, Total was rated as a huge potential investor in Alberta, with one law firm predicting that over the next 10 years Total would make a capital investment of up to C$20 billion in Voyageur alone, one of the largest in the company’s history.
Costs inflating, prices stable Andre Goffart, head of Total’s Canadian division, said Joslyn is facing the same challenge as its global peers “in the sense that costs are continuing to inflate when the oil price and specifically the netbacks for the oil sands are remaining stable at best, squeezing the margins that cannot be sustainable in the long term.
“We are still in a cycle within this industry where cost inflation is growing much faster than then price adjustments. We know there is a rebalancing that needs to be done,” he said.
“The best way to unlock this project is not to wait for the price increase, but to work proactively on price optimization. There is a clear shift now from the industry on cost discipline and return on investment versus the pace of development.”
It doesn’t help that Total has contracted to ship crude on three major pipelines - TransCanada’s Keystone XL, Enbridge’s Northern Gateway and Kinder Morgan’s Trans Mountain expansion - that are all in doubt, raising a barrier to market access.
Goffart, while unwilling to say how much his company has spent on Joslyn or under what conditions the project might be restarted, did announce that 150 project employees would either be laid off or transferred to other projects over the balance of 2014.
Suncor: Not both Suncor Chief Executive Officer Steve Williams has previously said it did not make sense to develop both Fort Hills and Joslyn at the same time, after indicating last August that Suncor would not agree until at least 2017 to move ahead with Joslyn.
Robert Bedin, director of energy research at ITG Investment Research in Calgary, was never persuaded by the blueprints for Joslyn, noting that Total’s oil sands experience had been shaky at best, confined to a joint venture with ConocoPhillips that produces 27,000 bpd, which Goffart said is still on track to achieve 136,000 bpd in 2015, using steam-driven extraction methods. But the French company has no track record in oil sands mines.
Bedin also questions the viability of Fort Hills, estimating oil would have to trade around US$100 to give the project a chance of breaking even.
Desjardins Securities suggested Total’s decision to halt Joslyn has “less to do with costs and more to do with not having a partner to buy in,” while CIBC Worlds Markets, which predicts Joslyn will come on stream in 2022, said Goffart’s concern about cost inflation “reflects concerns of a lower return on Joslyn specifically.”
CIBC said the Joslyn delay will eliminate for the time being “yet another stressor on oil sands construction costs,” which analysts are putting in the same league as the 2006-08 period when overruns of 50 percent and more were common.
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