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Husky Energy tries to avoid labor squeeze Looks for partners, possibly in U.S. or China, to upgrade Alberta bitumen; Petro-Canada partnership may expand upgrader’s size Gary Park For Petroleum News
Things are seldom black and white in the Alberta oil sands, but there was a definite hint of grey storm clouds gathering when Husky Energy put the skids under plans to build an on-site upgrader for its possible 300,000 barrel per day Sunrise project, blaming a severe and expanding labor shortage.
It was more than a faint echo of a mid-December decision by Imperial Oil to withdraw plans for an upgrader linked to its planned 300,000 bpd Kearl project when Chief Executive Officer Tim Hearn said the “gold rush mentality” in the oil sands was causing “really high inflation and very high costs.”
Husky Chief Executive Officer John Lau told an investor call that the current economics, labor supply and construction costs have eroded his company’s intentions of building an upgrader as part of the C$10 billion Sunrise operation, which is targeted to produce 100,000 bpd by 2012 and possibly triple output over the years.
He said the alternative to an upgrader in Alberta is to look for partners outside Canada.
Husky looking for partners While adamant there are no preferred options, Lau indicated the United States or China was on his mind.
A joint venture with a major U.S. company might be possible, although there is no specific candidate, and China could work given that Husky’s dominant shareholder is Hong Kong billionaire Li Ka-shing and Husky has teamed up with state-owned China National Offshore Oil Corp. to explore the South China Sea.
Without an upgrader, the Sunrise project costs could be slashed in half to C$5 billion, Lau said.
The project is expected to go before the board of directors for final approval later this year, and, according to a company spokesman, would cover all elements from production to upgrading.
Lau said a partner would “contribute half or whatever interest they have in upgrading and refining and we will consider whether they will participate in some of our projects.”
EnCana has also been hunting for a U.S. partner to upgrade more than 500,000 bpd it hopes to produce over the next decade, while Suncor has tried and failed over several years to establish a strategic upgrading alliance in the United States.
No Canadian answer to labor shortage Lau said there is no answer anywhere in Canada to the labor shortage in the oil sands sector.
“If you start a project now, you will be facing cost overruns and also delays,” he said.
The fear for the industry is not its ability to pay for developments in the current overheated commodity price cycle, but whether spending excessive capital now could rebound if oil sands projects become uncompetitive on a global scale.
In a research note, Douglas Porter, deputy chief economist at BMO Nesbitt Burns, warned that wage pressures will grow, “fanning out from Western Canada” along with a decline in national unemployment (now 6.3 percent across Canada and just 3.4 percent in Alberta).
But not everyone is being scared off by what Porter describes as the dangerous state of the Alberta economy, which he calls ground zero for wage pressures.
The C$10 billion Fort Hills oil sands project, led by Petro-Canada, is seeking regulatory approval to expand capacity at its proposed upgrader near Edmonton to 170,000 bpd from an original 100,000 bpd.
That could be another step towards a 400,000 bpd upgrader and an expansion of the Fort Hills mine and upstream operations from an approved 190,000 bpd to 400,000 bpd by 2015.
Petro-Canada spokesman Chris Dawson told Petroleum News that delineation drilling of two recently acquired leases near the Fort Hills site could lead to a “significant” hike in the current estimate of 2.8 billion barrels.
He said the Fort Hills project is less concerned about the rising cost of labor and materials, that forced Husky and Imperial into retreat, partly because it has secured 1,800 acres of industrial-zoned land near Edmonton for its upgrader.
Because of Edmonton’s size, with a population approaching 1 million, there is access to a large labor pool as well as transportation links that ease some of the pressures on those building upgraders in the oil sands region of northeastern Alberta, he said.
Partners in Fort Hills are Petro-Canada 55 percent, UTS Energy 30 percent and Teck Cominco 15 percent.
Regulators will be asked to approve the upgrader by early 2007, allowing construction to start in 2008.
However, Dawson cautioned that “economics are still the driver” in any decisions to proceed, although the longer oil prices remains above US$30 per barrel the “more economic” the Fort Hills resource base becomes.
A spokesman for UTS Energy said upgrading is an essential element at a time when bitumen is being sold at a 40 percent discount to West Texas Intermediate.
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