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December 2008

Vol. 13, No. 51 Week of December 21, 2008

Alberta oil sands frenzy fizzling

Sector could be headed for prolonged slowdown, C$100 billion scrapped and delayed; Merrill Lynch says 800,000 bpd could be shut-in

Gary Park

For Petroleum News

Total made its contribution to the collapse of oil sands mine and upgrader projects in Alberta on Dec. 12 and caused scarcely a murmur in the process.

The Canadian unit of the French oil giant withdrew its regulatory application for the Northern Lights mine, originally planned to produce 114,500 barrels per day of bitumen, just four months after wrapping up its takeover of Synenco Energy to take a 60 percent controlling interest in the project. SinoCanada Petroleum, a subsidiary of China’s Sinopec, holds the remaining 40 percent.

However, Total said it will push ahead with its Joslyn North mine, scheduled to produce 100,000 bpd by 2013. Joslyn South is in the project definition phase, targeting another 100,000 bpd four years after Joslyn North is in operation.

A spokeswoman for Total said Northern Lights is being integrated into the company’s overall oil sands strategy, but how that will take place is under review.

“We’ll reinstate (Northern Lights) at an appropriate time,” she said.

Change may be fundamental

This development serves mostly to endorse a school of thought that the oil sands are not just taking a time out during the economic crisis, but may be undergoing a fundamental change that will do what a lot of politicians, community leaders and environmentalists want and drastically slow the frenzy of development that has stretched professional services, labor and materials to the limit.

CIBC World Markets estimates project cancellations and delays affect C$100 billion worth of investment, wiping out 800,000 bpd of production, about half what was projected over the next five years.

But CIBC chief economist Jeff Rubin forecasts global output will “flatten materially, falling as early as 2010 as new capacity additions fail to keep pace with approximately 4 million bps of global depletion.”

He said supply strains will start emerging beyond mid-2009 … setting the stage for a return to US$100-per-barrel oil within 12 months.

US$38 oil needed

A Merrill Lynch report said oil sands projects need US$38 oil to break even, with many existing projects close to losing money at today’s oil prices and limiting the ability of developers to fund expansions.

If oil dips below that level, the firm says almost 800,000 bpd — about 30 percent of Canada’s total output — could be shut-in and another 800,000 bpd would be at risk if oil slipped under US$30.

“With demand vanishing across all key oil consuming regions, a strong rebound in prices in the first half of 2009 is unlikely,” Merrill Lynch analysts said.

The brokerage firm said in-situ oil sands projects need an economic threshold of US$38 and integrated projects (those than mine and upgrade) need US$30, while conventional projects have a break-even price of US$22.

A consensus among industry observers suggests projects are not likely to be revived even if oil prices return to US$90.

Should the current downturn help reduce costs that is not the only hurdle to be overcome.

Among the unknowns are what environmental measures the Obama administration will take that could undermine the oil sands sector and whether the Canadian government will follow that lead.

Alberta fallout severe

But the fallout is already severe in Alberta, with the Construction Owners Association of Alberta, an umbrella organization for Alberta’s largest construction companies, estimating that the workforce needs for 2010 — previously seen as a peak year — will be slashed to 22,000 from 44,000.

“There are a lot of layoffs happening in the shops and downsizing is taking place in the field,” said Lorne Oswald, president of Dacro Industries, a high-pressure vessel manufacturer.

“The massive importing of labor into Alberta has ended and a lot of those people are looking at going home again,” he told the Edmonton Journal, adding Dacro has had a number of contracts cancelled.

Oswald said he has never seen anything to match the current circumstances in his 35 years in the oil-related business.

“We’ve gone through some tough times in the oil patch, but this seems to be more widespread. The problem is complete uncertainty.”

He said Dacro has specialized in working for oil sands developers, where multiyear project deferrals indicate that no one appears to know what lies ahead.

Stephen Hutchison, general manager of Altex Industries, which produces heat exchangers, said his company has orders stretching through summer.

“But you never know when somebody is going to phone you and put their project on hold,” he said. “Customers can cancel at any time and buying has already slowed down.”

Crisis could halt oil sands

Bob Dunbar, president of consulting firm Strategy West, said a prolonged financial crisis could see the oil sands come to a halt once current work is completed.

He expects oil sands output to increase to 2 million bpd from the current 1.3 million bpd by 2010-11, but the goal of 3.5 million bpd by 2015 no longer seems attainable.

Even if there is a financial recovery in the near term, growth will only resume at a moderate pace because of the years needed to plan and build projects, obtain regulatory approvals and assemble the workforces.

Peter Tertzakian, chief energy economist at ARC Financial, said growth will now be influenced by lessons learned during the financial crash and the prospect of wild swings in oil prices.

He also said environmentalists have damaged the oil sands, which will cause developers to have second thoughts about whether and to what extent they want to be in the business.

Controversial report issued

Just this month, the Alberta government has been scrambling to downplay a report by Environmental Defense, a Toronto-based conservation advocacy group, which claimed ponds storing wastewater left over from the processing of bitumen are leaking about 11 million liters per day of contaminated water into Alberta’s ground water and natural ecosystems.

“Virtually everyone close to the tar sands industry knows that all tar sands tailings ponds leak — even the new ones — and that while steps are taken to recapture the leakage, a significant portion of the contaminated water still escapes into the environment,” the report said.

The study is viewed as the first comprehensive examination of water pollution from the mines in Alberta and was based on figures from environmental assessment applications submitted by oil sands companies.

The report said “tar sands tailings water is widely acknowledged to be harmful to human health and the environment,” causing serious reproductive impacts among fish, high mortality rates among birds and delayed germination among plants.

A scientist from the Alberta government’s Environment Department said the findings are misleading people by suggesting that the waste from the tailings ponds are contaminating natural ecosystems.

He said most of the wastes find their way into deep aquifers that are already naturally contaminated by the geology of the oil sands.

“They make some statements that are patently false,” said the scientist, Preston McEachern, who said the government is spending millions of dollars to research the environmental impact of the tailings ponds and is confident it can prevent any serious contamination of groundwater or ecosystems.

“Occasionally problems do occur … but we’re finding now that our systems are set up well enough that we detect them right away before they will ever become a risk to the environment,” he said.

Regardless of those assurances, the Athabasca Chipewyan First Nation, downstream of the oil sands, is taking the province to court, alleging it failed to consult with the community before allowing oil sands development on the nation’s traditional territory.

Chief Allan Adam said the Chipewyan people are worried that wildlife could disappear and water supplies could be in danger, demanding to be “at the table at the start of any kind of process involving development.”






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