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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2008

Vol. 13, No. 46 Week of November 16, 2008

Vortex swallows sands

9 sands projects sidelined; CNQ delivers major blow; Husky injects note of hope

Gary Park

For Petroleum News

If all the world’s petroleum regions getting hammered in the current financial storm, none figures larger than the Alberta oil sands, where nine projects have been delayed, deferred, or, in the current jargon, “re-profiled” in the last two weeks.

Royal Dutch Shell, Suncor Energy, Petro-Canada, Nexen, Total and Canadian Natural Resources — accounting for most of the major upstream players in the oil sands — have put expansion plans on hold, with little hope of a revival within the next year.

StatoilHydro, BA Energy and Value Creation have all recently either halted or pushed back onstream dates for bitumen and heavy crude upgraders, leaving only one to proceed and about C$90 billion worth of new investment in so-called Upgrader Alley near Edmonton in limbo.

Only three of the upstream developers, Imperial Oil, EnCana and Husky Energy, have left their timetables intact, for now.

How many billions of dollars that will put on the shelf and for how long is impossible to calculate, but the corporate moves are a major setback to those counting on spending of C$120 billion or more over the next decade.

One of the few upbeat voices in the midst of so much gloom is Husky Chief Executive Officer John Lau, who traditionally ducks the spotlight while executing a careful strategy in Canada and Southeast Asia of using net cash flow from operations to finance its capital plans.

“I’m quite sure major developers with deep pockets will continue to focus on oil sands developments because it will be a 40-year production life,” Lau said in October. “At this stage it depends on the market fluctuations, but I’m quite sure majors will have the confidence to continue in this cycle.”

Most not upbeat

That voice of reason is having a tough time commanding an audience these days.

Canadian Natural Resources (better known as CNQ) was still an enthusiastic promoter of its oil sands prospects only a few months ago, touting its chances of raking in billions of dollars in profits from its Horizon project, which it eagerly told the world was on time and on budget because of a tightly controlled construction strategy.

Now that the first stage of Horizon is weeks away from launch, the CNQ tune has changed.

After the latest budget increase, the initial phase is now expected to cost C$9.7 billion, compared with C$6.4 billion in 2004 — no different from any of the other oil sands mega-ventures.

It doesn’t sit well with company executives.

“At Horizon, we are not on time or on budget,” said a plainly disgruntled President Steve Laut. “That does not meet our criteria for success. We need to set the bar higher. The environment is scary. We will not build in a high-price environment for a moderate-price world.”

In one of the most candid assessments yet by a Canadian industry leader, he told analysts the “world has changed ... the drop in oil and gas prices will have a significant impact on the industry and the credit crunch will bring its own challenges.”

“Our bosses, our shareholders, want to see us go harder, so there is always a lot of pressure to increase production. When you see companies pull back and slow down, you know things are pretty rocky.”

CNQ slashes spending

For all the pressure to grow, Laut made it clear that CNQ is no longer in a “mega-project mode,” starting with its 2009 capital budget — the first to be released by a major Canadian-based company — which slashes spending to C$4 billion from C$7.6 billion in 2008.

Much of that is covered by completion of the Horizon first phase, which will reduce that element of the budget to C$574 million from C$4 billion.

It was only three years ago that CNQ started trumpeting its plans to spend C$20 billion over 15 years on additions to Horizon, setting a goal of 800,000 bpd for oil sands and heavy crude output, with Horizon itself targeted for 232,000 bpd in 2011 and 500,000 bpd by 2017.

“We are very confident,” Laut said in late 2005. “If you look at the growth profile we have going forward compared to the growth profile we’ve had over the last 15 years, it doesn’t look that scary.”

There’s the word “scary” again, uttered in what must now seem like an, unreal age, not that CNQ isn’t clinging to its claims of a strong, diversified company.

The 2009 budget represents a C$1.6 billion trimming of earlier plans for Horizon expansion, which will be “re-profiled” to improve cost management, he said.

“We will take our time (on future projects) and do it right,” Laut said, while suggesting “it will take more than a year before there is a normalization of costs.”

That will involve working on smaller elements of projects by “doing the engineering and minimizing field work,” he said.

Laut cited one example of how fast the cost environment is shifting. He said CNQ in May estimated the cost of a small gas project at C$20 million, but shelved the work after receiving bids ranging from C$40 million to C$75 million. The job was done recently for just C$14 million by a contracting company which found itself “between jobs.”

Not that Laut is counting on a rush to resume projects once commodity prices recover and costs ease.

“Say the environment does improve and the costs get better, then everybody wakes up and says, ‘OK, now we should go,’ What we’re going to face there is everybody goes at the same time and just creates the same issues,” he said.





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

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