Upgraders in a bind
Gary Park For Petroleum News
Proponents of new and expanded bitumen upgraders have just received a short, sharp message from investment dealer Peters & Co. Ltd. — they need oil prices of $70 per barrel West Texas Intermediate to achieve desirable economic returns.
In an oil sands review, Peters said it is “quite evident” that the rates of return on a standalone upgrader are “not favorable” at current oil prices and with a 30 percent differential between light and heavy crudes.
The study estimated the rate of return for independent upgraders is just 7.4 percent, based on today’s oil prices, current price differentials and a construction cost of C$55,000 per daily barrel.
Given that a typical standalone steam-assisted gravity drainage project could generate a return of 14 percent in the current price environment, building an associated upgrader would cut into that return, Peters said.
The review said upgrading offers a bleaker outlook among the three components of the oil sands industry, trailing oil sands mining and SAGD.
Among the mining operations, the study estimates an oil price of $50 per barrel is needed for new mines that do not involve extensions of existing infrastructure.
But the report paints a positive picture for both mining and SAGD operations, suggesting the current futures oil strip of $68 a barrel until 2012 outweighs the rising breakeven costs, while SAGD projects should be economic with oil prices higher than $40 per barrel even though SAGD costs are climbing.
At present, BA Energy (77,500 barrels per day), North West Upgrading (150,000 bpd) and Peace River Oil (50,000 bpd) are at various stages of developing merchant upgraders. The Peters’ report said these independent projects “will be challenged in this high-cost environment” based on the potential marginal economics.
Because of the demand for labor and materials, some projects are likely to be delayed or deferred, the review said.
Typical of the unease among upgrader proponents is France’s Total, which is taking an even closer look at its plans for a 200,000 bpd (starting at 130,000 bpd) facility near Edmonton.
Michael Borrell, president of Total’s Canadian subsidiary, told the Calgary Herald a study due for completion in the first quarter of 2008 will give a basic indication of cost and configuration.
He said the best way to ease the cost impact is to plan, engineer and factor in current market conditions, adding that Total’s pre-engineering work will examine contracting and labor strategies.
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