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Devon Energy, Baytex Energy push ahead Two oil sands operators remain on track despite report gap between oil sands costs, breakeven narrowing; M&A likely to quicken Gary Park For Petroleum News
Devon Energy obtained regulatory approval Sept. 8 to build the second phase of its Jackfish oil sands project in Alberta and immediately announced it will move ahead with the project.
Jackfish 1 has already reached 15,000 barrels per day after coming onstream early this year and is ramping up to its peak 35,000 bpd by early 2009.
Devon’s Canadian unit already has 42,000 bpd of heavy oil output from the Lloydminster region of northeastern Alberta.
A company spokesman said Jackfish 1 cost about US$730 million and Jackfish 2, scheduled to reach full production of 35,000 bpd by 2012, is expected to cost US$1.l06 billion, reflecting the rise in labor and equipment costs in the oil sands.
Both phases use steam-assisted gravity drainage technology, which involves pumping steam under high pressure to melt bitumen deposits and force them to the surface.
Devon President John Richels — previously head of the Canadian operations — describes the oil sands operations as a key part of the company’s North American portfolio and an important element of meeting “the future energy needs of North America.”
Baytex reports test results On the western side of Alberta, Baytex Energy Trust has reported better-than-expected test results from its Seal oil sands property in the Peace River area.
It completed construction of a thermal pilot project in the first quarter and has a 100 percent working interest in more than 64,000 acres of long-term leases.
UBS Securities analyst Grant Hofer said the long-term potential of the Seal property “dwarfs Baytex today … (and) should drive significant value appreciation” for Baytex whose trust units will peak at C$32, while cautioning investors to take a wait-and-see approach.
“Without a concrete development plan it is too early for investors to ascribe much value to the ultimate potential within Seal,” UBS said.
Investment dealer Peters & Co. forecasts it will take at least two years to develop the Seal project, with analyst Jeff Martin sticking to his 12-month Baytex target of C$32.
Projects being squeezed In the background, National Bank Financial Senior Vice President Peter Ogden said in a report that oil sands projects are getting squeezed as rising costs boost the breakeven price for the sector.
His report now estimates the threshold is US$85 per barrel for oil sands mining projects, up $20 per barrel or 31 percent in just over a year.
In May 2007, the breakeven price was $65 per barrel, assuming an 8 percent rate of return, capital cost of C$100,000 per flowing barrel and operating costs of C$20.50 per barrel.
However, Ogden does not anticipate projects will be cancelled just yet, although a decline in oil prices will likely see more marginal projects deferred, lowering construction costs and making better ventures more profitable.
Otherwise, he expects capital costs for mining projects to rise in the range of C$125,000-C$160,000 per flowing barrel.
The prospect of deferrals has caused the Canadian Association of Petroleum Producers to lower its oil sands production target to 3.5 million bpd in 2020, down 11.5 percent from a year ago.
Ogden reported that the breakeven price for projects using steam-assisted gravity drainage methods has risen more modestly to C$70 per barrel, up 21 percent since May 2007, also based on an 8 percent rate of return.
He said these thermal projects are profitable at lower oil prices because they need less up front investment.
Last year’s calculation of a break-even price was based on capital costs of C$80,000 per flowing barrel and operating costs of C$22 per barrel.
Ogden forecasts an increase in merger-and-acquisition activity now that lower oil prices have dragged share prices for oil and gas companies to their lowest level in two years, listing EnCana’s oil sands spinoff, OPTI Canada and UTS Energy as companies “with a target on their back.”
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