Rallying to oil sands

French, Norwegian firms make a case for expanding their presence in Alberta

Gary Park

For Petroleum News

From big and small, from domestic and international stages, there is a steady, rebuilding drumbeat of support for the Canadian oil sands, motivated largely by a belief that cheap oil is disappearing.

The International Energy Agency said production from large existing fields around the worlds is shrinking by about 7 percent a year, while the rate of decline is happening even faster.

France’s Total, admittedly a minority voice among majors, is predicting that global output will “plateau” at 95 million barrels per day after 2020, only 10 million bpd higher than current volumes, which explains why Total is betting so heavily on a future in the heavy oil plays of Canada and Venezuela.

“We believe that, because of plateau oil, the oil sands are necessary to supply demand growth,” said Yves-Louis Darricarrere, Total’s exploration and development president.

In fact, Total has earmarked up to US$20 billion in spending over the next decade to enlarge its presence in Alberta.

Although the company abandoned its hostile bid for UTS Energy, which owns 20 percent of Petro-Canada’s Fort Hills project and 50 percent of three oil major leases, there is a continuing rumble that Total may return to the scene of the battle or possibly launch a fresh takeover offer for OPTI Canada, which owns 35 percent of Nexen’s Long Lake project.

Bolstering Total’s outlook is a 4 percent decline in British North Sea production, despite heavy investment in production and reserve technology, and a decline in Mexico’s Cantrell field (recently the world’s second largest producer) that is two or three times faster than the North Sea.

Of the non-OPEC production, 70 percent comes from seven countries, of which only Canada is adding to its production every year, while Saudi Arabia is the only OPEC country to post increases.

Mixed results

Regardless of the steep learning curve — and having a major role in Canada and Venezuela means Total can share its hard-won knowledge in both countries — the French oil giant sticks resolutely to its belief that the oil sands have a certain future and its commitment to become a major participant in the resource.

OPTI, which brought a new extraction technology to Long Lake, could be an obvious target, if you accept reports that it is struggling to cover its share of the C$6.5 billion project.

And should Total make a bid for OPTI that would revive talk last year that it was eying a takeover run at Nexen.

StatoilHydro also resolute

Greenpeace wants StatoilHydro to abandon its C$2.2 billion acquisition two years ago of North American Oil Sands Corp., which controlled 257,000 acres of leases and 2.2 billion barrels of recoverable reserves.

The Norwegian company — the world’s fourth largest oil exporter — followed up that deal by announcing it was ready to spend US$15 billion to attain production of 200,000 bpd by 2020, describing the oil sands as a “very important and high focus” element of its international portfolio.

In addition to Greenpeace’s campaign, Norway’s Christian Democratic Party (a small voice in the parliament) will ask for a vote on whether StatoilHydro should be forced to withdraw from the oil sands.

Bob Skinner, senior vice president of the company’s Canadian unit, told the Financial Post that StatoilHydro’s oil sands strategy remains on track and will not be reconsidered.

He said a demonstration project is 50 percent completed and its application for a larger separate development will remain before regulators.

That approach was resoundingly endorsed May 19 by StatoilHydro shareholders, who voted 99.85 percent to support their company’s role in the oil sands, rejecting calls to withdraw from Canada.

Norway’s deputy petroleum and energy minister Robin Kaass, said it would be “unnatural” for the Norwegian government to overrule a decision by the StatoilHydro board, although the company will be held to the “highest standards for ethics and the environment.”

Devon will focus on sands

Devon President John Richels said earlier in May that the company’s wholly owned Jackfish development is also benefiting from a softer Canadian dollar, some cost reductions and improved access to labor.

As a result, Devon is pushing ahead with the second stage of Jackfish, costing about US$1 billion, funding the work with cash flow from the first phase.

Japan Canada Oil Sands, a wholly owned unit of Japan Petroleum Exploration Co., also updated an assessment of its Hangingstone lease, held jointly with Nexen, where it currently pumps 8,500 bpd.

Japan Petroleum with 75 percent (including 3.75 percent for Japan Canada) and Nexen with 25 percent estimate they can raise the output to 35,000 bpd over 25-30 years starting in late 2014.

The information is contained in a documents filed with the Alberta government as part of an environmental impact assessment.

Connacher ramping back up

Connacher, a startup company, was one of the first to shelve its expansion plans last year when the economy went into a tailspin and is now one of the first to come back to life, boldly declaring it has “weathered the storm” of low oil prices.

Chief Executive Officer Dick Gusella said Connacher is ready to resume ramping up production at its Great Divide project in Alberta, five months after stalling progress.

He told analysts that Connacher is confident it can again achieve its objective of “stable and sustainable production” at or close to plant capacity of 10,000 bpd in the second half of 2009.

“With rising oil prices and lower costs and continued narrow differentials for heavy oil due to bottom market considerations, we now have healthy, positive and improving bitumen netbacks which augurs well for future growth” in the in-situ sector, he said.

Current output at Great Divide is 8,000 bpd and operating costs are targeted at C$15-$17 per barrel for the balance of 2009, which would make Connacher one of the low-cost oil sands operations, Gusella said.

He said the company has also lined up new markets for its bitumen from regional upgraders.

Gusella denied rumors that Connacher is squeezed for cash, saying the company had a cash balance of C$100 million at the end of March and forecast positive cash flow in the current quarter and further improvements over the second half.

If oil holds steady at US$45 per barrel WTI “we will have sufficient funds to meet all our obligations and still end up with surplus cash,” Gusella said.

UTS thinks cost could fall

The company said on its Web site that it would not have to obtain any financial backing if estimated costs of Fort Hill’s initial 160,000 bpd phase keep falling.

Petro-Canada, which is 60 percent operator, said in April that the changed economic environment, with labor and materials costs undergoing rapid change, means the first-stage budget has declined to C$10 billion from C$14 billion and UTS said it may now actually cost closer to C$8 billion.

UTS Chief Executive Officer Will Roach said the latest cost estimates “reflect the new business environment and the reality are currently in.”

In a best-case scenario, UTS also thinks that estimate could fall to C$5 billion if there is a dramatic change in the scope of Fort Hills and the project could benefit from a union of Suncor and Petro-Canada facilities, including access to electricity and hot water from Suncor.

But the proposed C$19 billion merger of the two Canadian energy giants is encountering choppy water, with Letko Brosseau & Associates, a Montreal firm with about 2.1 percent of Petro-Canada’s shares, objecting to the fact that Suncor will control 62 percent of the new entity.

Daniel Brosseau, the firm’s president, argued Petro-Canada represents more than 60 percent of the cash flow, reserves and production, while its asset values at least match those of Suncor.

The investment firm said it is aware of a second major investor that shares its concerns, although it has not yet attempted to build support among other shareholders.

From the fringe to the center

If the current economic recession is not too long or deep.

And if the pace of technological change can move ahead of government climate-change legislation.

Those two issues will “shape all growth of the oil sands,” said Daniel Yergin, chairman of Massachusetts-based CERA and author of The Prize, the Pulitzer Prize-winning book on the history of the global oil industry.

But the study, entitled “Growth in the Canadian Oil Sands: Finding a New Balance,” compiled over the last eight months and released May 18, is in no doubt that the oil sands “have moved from the fringe of energy supply to the center. … They are now one of the major resources in the world with potential for very substantial expansion.”

“More than ever before, North America’s daunting energy, environmental and economic challenges require a careful balancing of oil production, energy security, social and environmental impact (including greenhouse gas emissions) and economic growth,” said a backgrounder to the study.

It described the oil sands as the largest and most complex upstream play in North America, “which lies at the convergence of all the challenges facing the continent.”

“The choices that governments, companies and communities make in managing the interplay of these challenges will be critical in determining the pace and outcome of investments in Canadian oil sands,” CERA said.

The oil sands ranked Canada No. 4 on the study’s list of the top 15 countries in the world, based on their potential to raise production over the next decade, with Canada and Brazil the only Western Hemisphere countries to find a place on the list.

Yergin said the resource faces the “double challenge of cost and environmental questions (to which) innovation is the answer on both fronts.”

Alberta production could grow

The study determined that oil sands projects need crude prices of US$60-$85 per barrel to be economic.

Under three scenarios for oil sands development, CERA estimates production could range from 2.3 million bpd to 6.3 million bpd by 2035, with the low-growth outcome reflecting a world of weak economic growth and weak oil prices and the high-growth forecast representing a robust economy and oil prices.

CERA concedes its findings come at a difficult time when most major oil sands projects have been cancelled, postponed or reduced in size because of the slump in oil prices and uncertainty over the duration of the economic downturn that Yergin said “really does come at a critical juncture for the future of the oil sands.”

The study urged Canada and the United States to establish a joint approach in regulating greenhouse gas emissions to reduce market distortions and head off any trade conflicts.

It argued that the impact on climate change of oil sands operations might not be as severe as many critics suggest.

CERA said that although extracting and processing oil sands bitumen through combustion of its refined products emits more GHGs than the average barrel consumed in the United States, its “wells-to-wheels” analysis shows emissions are only 5-15 percent greater than the average barrel, because 70-80 percent of total carbon emissions from crude oil result from burning refined products such as gasoline.

The firm also called for governments to play a greater part in advancing new technologies to lower emissions, rather than placing their hopes on the costly and unproven carbon capture and storage method.

James Burkhard, study director and managing director of IHS CERA’s Global Oil Group, said several new technologies in various stages of development could “significantly increase production and the efficiency of oil sands operations, but they must be proven effective and economic at scale.”

—Gary Park