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Bigger is better Two of Alberta’s smaller oil sands players hit the wall in efforts to join production fraternity; one sells options; one needs cash Gary Park For Petroleum News
In is almost an article of faith in the Alberta oil sands that startups and juniors have little hope of succeeding as standalone commercial operations.
Credence was added to that view earlier in April with two smaller companies — Sunshine Oilsands and Athabasca Oil — finding themselves unable to achieve their original goals.
Athabasca has exercised an option to sell its remaining 40 percent stake in the planned 250,000 barrels per day Dover project to its partner PetroChina for C$1.32 billion, having earlier sold 60 percent holdings in the Dover and MacKay River thermal projects to PetroChina in 2010 for C$1.9 billion.
Athabasca Chief Executive Officer Sveinung Svarte said the latest deal puts an end to the Brion Energy joint venture by the two companies and frees Athabasca to move ahead with its “real business” in the Duvernay resource play in central Alberta.
The company said its decision to sell was made possible on April 16 when Alberta Environment gave its final regulatory approvals to the Dover project.
The initial 50,000 bpd phase of Dover is expected to cost at least C$2.5 billion, but Brion has yet to set a timeline.
Mark Friesen, an analyst with RBC Dominion Securities, said in a note to clients that the deal should improve Athabasca’s chances of establishing a joint-venture partnership in the Duvernay.
Athabasca hasn’t bailed But Athabasca has not yet bailed out of the oil sands. It holds 100 percent of the C$565 million Hangingstone thermal project which is on track to produce its first steam within a year, although observers have suggested that it, too, could go down the same path as Dover and MacKay River.
By any measure, Sunshine had all of the pieces in place to lead the way among Alberta’s smaller oil sands players.
It had five leases in hand with resources in the multibillion barrels to achieve its goal of producing 1 million barrels per day, along with backing from Chinese and Asian financial and energy investors.
But all of that hope as started coming adrift over the past year, landing the company in a tangle of 71 lawsuits seeking to recover C$94 million in unpaid bills, equivalent to about one-fifth of the company’s stock value.
Issue with startups, juniors What’s happening to Sunshine is among the clearest evidence yet that the oil sands are not suited to development by startups and juniors beyond giving them an opportunity to assemble resource interests that they can unload at a handsome profit.
Sunshine has been grappling for some time with cost overruns.
Its troubles culminated in the abrupt resignations four months ago by two of its top executives — Chief Executive Officer John Zahary and Chief Financial Officer Robert Pearce.
That disclosure was included as almost an after-thought in a release by the company, which said: “There are no disagreements with the board of directors relating to the resignations that need to be brought to the attention of shareholders.”
Concern for analyst Outsiders weren’t quite so bland, with TD Securities analyst Mike Dembicki describing the loss of the two men as a “negative” for Sunshine.
“We believe the lack of senior leadership is an additional hurdle on an already negative near term outlook giving that financing for its West Ells project was already questionable,” he said in a note to investors.
Friesen said the management changes were a “further indication of the current financial, operational and performance related issues facing the company.”
For now, David Sealock, executive vice president of operations, has been named as interim president and CEO.
Earlier in April, Sunshine directors and co-chairmen said they would accept shares instead of cash for half of their compensation as the search continues for money to complete the West Ells project, which is scheduled to enter the commercial production phase this year at 10,000 barrels per day, targeting an eventual 100,000 bpd.
Of the company’s other ventures, Thickwood has regulatory approval to launch an initial 10,000 bpd first phase that is forecast to grow to 70,000 bpd; Legend is awaiting approval to come onstream at 10,000 bpd as part of a 230,000 bpd operation at Legend/West Ells; Muskwa is estimated to have 22 billion barrels of petroleum initially in-place; and Harper, with 10 billion barrels initially in-place in a carbonate deposit, is seen as a possible 600,000 bpd operation.
Troubles override promise But the troubles override the promise of these holdings, with a Hong Kong-based subscriber to a C$46.1 million private placement for Sunshine announcing in January it was assigning half of those units to another party.
Sealock said the funds Strong Petrochemical Holdings will make available will sustain Sunshine while it tries to raise capital to complete and commission West Ells.
“The primary reason for the delays in getting financing has been the pullback in the debt markets for the development of oil sands projects,” he said.
It is estimated that the company needs C$300 million to restart construction that was halted last August when 80 percent of the project had been completed and bring the initial phase of West Ells to commercial production.
The challenge facing Sunshine is similar to the obstacles every oil sands company has to overcome, with the exception that it has the backing of some of the largest state-owned enterprises in China as well as the C$570 million it raised in an initial public offering.
The startup capital has distributed ownership stakes among China Life Insurance 7.3 percent, Bank of China 6.5 percent, China Investment Corp. 7.6 percent, Sinopec 7.6 percent and Orient International Resources controlled by Hong Kong businessman Hok Ming Tseung at 9.3 percent.
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