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Wrestling with the risks in Alberta Smaller oil sands players pinned by startup woes, inability to finance holdings; Suncor not ruling out building on industry-leading position Gary Park For Petroleum News
Some either want out or want a reduced presence; some are struggling to keep their heads above water; some are now paying the price for the rush to complete projects during a frenzied boom that ended two years ago; and some are bent on expansion.
It’s all part of the relentless volatility of the Alberta oil sands business that is moving to a crescendo.
While two startup companies — UTS Energy and OPTI Canada — are moving toward the exits, powerhouses — Suncor Energy and ExxonMobil — are bulking up in what observers view as one of the industry’s highest-risk sectors that faces a two-pronged challenge: the uncertain long-term outlook for crude oil demand in North America and the equal uncertainty of what climate-change regulations lie ahead.
Right now there are more fancy moves taking place than you can count on Dancing with the Stars and many of them are accompanied by an underlying mood of disquiet, notably for Canadian Natural Resources as operator of the Horizon project and Nexen as operator of Long Lake.
Canadian Natural paying the price Canadian Natural, which took great pride in its careful step-by-step progress toward bringing the C$9.7 billion Phase 1 of Horizon on stream earlier this year, is apparently paying the price for what company President Steve Laut now candidly admits was inferior “quality control and quality assurance” during a heated construction period when labor was in such high demand.
And he just as candidly pins the blame on the company and its suppliers, exempting the “very good job” done by manufacturers.
He told analysts during a conference call Nov. 5 that the operational setbacks “have not been trivial” since June when Horizon reached 92,000 barrels per day on its way to 110,000 bpd, dropping to an average 67,000 bpd in the third quarter.
The experience has made Canadian Natural edgy about its planned expansion, allocating C$479 million in 2010, partly to “increase reliability” as it chases a goal of 232,000 bpd.
Nexen, OPTI startup problems Equally troubled by startup problems, Nexen and OPTI (which owns 35 percent) have set aside their once confident production timetable, adding to delays in bringing the C$6.1 billion (C$2.7 billion above the initial estimate) Long Lake to its nameplate capacity of 72,000 bpd for Phase 1, a target originally set for late 2009, then stretched to late 2010. Some analysts have suggested the peak could be two years away.
Chief Executive Officer Marvin Romanow said Nexen has stopped forecasting a full production date because oil sands projects “are unique operations whose startup does not necessarily follow a linear path. … They take two to four years to ramp up.”
He admitted the startup has “gone sideways,” averaging just 9,000 bpd in the third quarter and sidestepped questions on when the plateau will be reached.
However, he indicated it could take most of 2010 to resolve water handling issues, just one of many problems that saw production shut down for a few weeks.
“I think it’s extremely important to keep our eye on the long-term goal,” Romanow said. “We have very significant value to create here over the next 40 years as we look to develop and monetize the 6 billion barrels of inventory we have in our portfolio.”
For the near term, he said Long Lake bitumen production is now back to pre-turnaround rates of 10,000-12,000 bpd, creating sufficient feedstock to make the upgrader startup “imminent.”
Haywood Securities analyst Alan Knowles insisted Long Lake remains an “attractive” project, noting it’s “eventually going to get there; it’s just going to take longer than everyone thought.”
OPTI needs cash flow For OPTI that raises questions about its ability to survive, despite its key role in bringing proprietary technology to the project. The process involves gasification that uses waste byproducts to fuel an upgrader that virtually eliminates the need for natural gas — usually the largest input cost at in-situ projects.
But the early hiccups have affected OPTI, which has no other source of cash flow. To ease the strain it sold 15 percent of its Long Lake interest to Nexen in January for C$735 million (plus net proceeds of C$142 million from the sale of 85 million shares), which some analysts estimate will be consumed within six months.
The pressures have forced OPTI to hire financial advisers to find a buyer for the company, unload more of its assets or restructure its debt.
OPTI said the “ultimate objective of carrying out this review is to determine which alternative might result in superior value for shareholders.”
OPTI Chief Executive Officer Chris Slubicki said “We’ve always felt we need to take some of the perceived questions and risk out of the project. I think we’ve done a lot of that.”
He said a sale could involve other oil sands leases or the unsanctioned second phase of Long Lake.
Romanow said Nexen has no immediate plans to change its ownership stake.
He declined to comment on Nexen’s view of OPTI’s financial strength, although analysts say OPTI could run afoul of debt covenants in the first quarter of 2010 unless Long lake production ramps up.
Romanow said the Long Lake joint venture “was always designed to allow one party to proceed if the other one was unwilling or unable.”
UTS is in a similar fix, unsure where the Fort Hills project stands in the portfolio of new operator Suncor Energy.
Even if the project does proceed, UTS will then have a tough job financing its 20 percent stake, although the junior company did keep its lifeline open by selling three undeveloped leases to Imperial Oil and ExxonMobil for C$250 million.
“With Suncor operating Fort Hills and the macro environmental substantially improved, we continue to be quite encouraged and optimistic about the prospects,” said UTS Chief Executive Officer Will Roach.
Suncor remains coy Suncor, now the largest Canadian oil and gas producer, is remaining coy about its plans beyond hinting it will take a more measured approach to new projects as it works on a corporate strategy which Chief Executive Officer Rick George said is “first and most importantly” to become an integrated oil sands company.
To that end, Suncor expects to unload assets worth C$2 billion to C$4 billion next year, including about 30 percent of its North American gas assets (with holdings in the U.S. Rockies on the block) that yielded 772 million cubic feet per day in the third quarter; smaller fields in the United Kingdom North Sea; and offshore interests in Trinidad and Tobago that were inherited from Petro-Canada.
But the proceeds will be largely used to help lower Suncor’s net debt from C$13 billion to C$10 billion in 2010.
George said only cash from existing operations will be used to finance the company’s long list of oil sands projects as Suncor avoids a repetition of the “firestorm of inflation” in northern Alberta.
The sales list does not include Suncor’s 12 percent stake in the Syncrude Canada consortium, despite moves by ConocoPhillips to divest its 9.03 percent holdings.
George said Syncrude provides a window on technological and operational improvements in the oil sands and protects the company against production problems in its other operations.
He believes the oil sands will eventually be dominated by ExxonMobil, Royal Dutch Shell, Canadian Natural Resources, Suncor and “some other players.”
“We have more opportunities than we have capital to invest, so it’s about ranking them,” he said.
“In the future, Suncor is more likely to be an acquirer than a seller of oil sands assets,” George said, adding: “It’s our heartland … that’s the area we’ll compete in on a worldwide basis” as it develops existing resources of 26 billion barrels.
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