Fort Hills a test case

A short time ago, UTS Energy had little doubt it could cover its share of costs for the first phase of the C$25 billion Fort Hills oil sands project, operated by Petro-Canada.

By early October, following a 75 percent slump in UTS share values over just two months, worries started to grow that the startup company was entering a battle for its survival.

“I simply don’t really understand it,” said UTS Chief Executive Officer Will Roach. “The rationalization must be that the market has decided that we will not be able to finance our share of the project and therefore we’re not a good bet.”

If things were bad then, they’ve become a whole lot worse.

Holding steady in the C$5-C$6 range for the first seven months of 2008, UTS started its precipitous descent in August and is now trading well under C$1.

It chances of survival will likely come into sharper focus before year’s end, once the Fort Hills partners — Petro-Canada 60 percent, UTS 20 percent and mining giant Teck 20 percent — decide if, when and how they will proceed with the largest oil sands project currently in the holding pattern.

The consensus, reinforced by the partners themselves, is that Fort Hills will initially be limited to a mining and extraction plant turning 160,000 barrels per day of bitumen into 140,000 bpd of synthetic crude at a cost of at least C$15 billion. That would see a planned C$10 billion upgrader shelved.

UTS Chief Financial Officer Wayne Bobye said that based on talks with potential financial backers, UTS believes that limiting the first-phase to a mine will give his company time until “the financial markets stabilize.”

Roach said support for a fully integrated mine and upgrader could place UTS in a financial bind by the end of 2009, whereas a standalone mine could extend its financing capacity to mid-2010.

How the Fort Hills partnership resolves its challenges could provide a clear sign-post to where the oil sands are headed over the next couple of years.

—Gary Park