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Telling it like it is Oil sands pioneer Suncor takes axe to spending program, freezes C$20.6B project Gary Park For Petroleum News
The Canadian petroleum industry may have passed the point where it will bother to camouflage how tough times are, with oil sands pioneer Suncor Energy making the most drastic disclosure yet.
The world’s second-largest producer of synthetic crude after Syncrude Canada, Suncor has slashed its 2009 capital budget to C$3 billion, down 50 percent from its forecast last October and 70 percent from an earlier projection in 2008.
In reporting its first quarterly loss in 16 years, Suncor has indefinitely shelved its C$20.6 billion Voyageur expansion project and plans for Stages 3 through 6 of its Firebag thermal operation, which were designed to boost design production to 550,000 barrels per day by 2013 from 350,000 bpd. To date, C$7 billion has been invested.
At the same time, Chief Executive Officer Rick George disclosed that discussions have taken place “with other people in terms of either a long-term processing deal or even ownership of upgrading assets.”
That represents the previously unthinkable for a company that, 40 years ago, led Canada into the age of commercial oil sands production and has taken great pride in what it has accomplished through growth, technological innovation and reduction of its greenhouse gas emissions, while building an impressive reputation for its treatment of employees.
George, who never hesitates to deliver a clear, unequivocal message in conference calls with analysts and investors, was more direct than usual on Jan. 20 in painting a picture of what he called a “very tumultuous time.”
“We just don’t know how long this (price) trough will last, when we’ll see the commodity cycle start moving back and when we’ll see oil prices, for example, move back up.
“We do know it will occur. We just don’t know when. For prudence, we decided to cut to a C$3 billion budget.”
Bracing for $40 oil Chief Financial Officer Ken Alley said Suncor is bracing itself for oil prices of about US$40 per barrel.
George was emphatic that the Voyageur and Firebag projects will be built, adding “it’s just a matter of when.”
But he also made it clear the strategy will be different when work resumes.
“What you can expect from us is that we’ll no longer talk about Voyageur as a big, C$20 billion project. When we restart these, we’ll restart them one project at a time,” he said.
That, he said, will be a “time when we feel we have better control of our costs and when we can fund it without doing any stress to our balance sheet.”
The surprise for analysts was George’s disclosure that Suncor is “open for business,” by trading an equity stake in the Voyageur upgrader for investment and is talking to other companies about processing their bitumen for a fee.
What Suncor won’t consider is selling any of its oil sands reserves.
“There is so much value in owning reserves,” he said. “That is the core of why Suncor exists today and we’re not giving up on them.”
Focus on two things in ‘09 In retreating from its original spending program and allocating only C$1 billion this year on growth projects and C$2 billion on sustaining work, Suncor will concentrate on two things in 2009, rather than bemoaning the low crude oil price environment, George said.
Taking a glass-is-half-full approach will see Suncor work on: operational excellence, which “is getting the most out of the assets we have on the ground” by hiking production this year to 300,000 bpd from the oil sands, from last year’s 228,000 bpd, which was constrained by planned and unplanned maintenance; and cutting costs.
“This is a time of great uncertainty,” he said. “It’s also a time of opportunity. For us, it’s a time to focus on costs … and we’ll get our entire workforce engaged.
“We will face a period where we have much less competition for human resources, internally and externally.
“And I think the industry in general will find growth on a go-forward basis will be much easier to manage, with much more predictability.
“For the first time in almost a half a dozen years, we have the opportunity to go out and gain significant control over our costs — both on an operating basis and a construction basis,” he said, adding there have already been signs that contractors and suppliers are open to reviewing costs.
Hughes leaves Husky Another telling announcement got much less attention, when Husky Energy lost the head of its oil sands operation after less than two years on the job, raising speculation that its C$10 billion, 200,000 bpd Sunrise project (part of a joint venture with BP) could be destined for the shelf.
Catherine Hughes, who joined Husky in 2005 after running Schlumberger’s Canadian operation and was later promoted to vice president of oil sands, took her leave after the company consolidated its oil sands and heavy oil business units.
Husky has already announced spending on Sunrise this year will be cut by 78 percent to C$65 million, but is not expected to disclose the future of the project until its fourth-quarter results are released Feb. 4.
In the meantime, the company will say only that Hughes left of her own accord to “pursue other options.”
Trickle-down effect The trickle-down effect of Suncor’s budget contraction is turning into a cascade for some Canadian companies.
Two Alberta-based companies alone figure their revenues will be cut by C$180 million.
Flint Energy Services, which provides production services, field construction, process equipment design and manufacturing, expects to lose C$100 million to C$150 million in 2009 cash flow, resulting in immediate layoffs of construction workers at Firebag 3, with more to come later.
Edmonton-based Lockerbie & Hole said Suncor’s pullback will defer C$35 million in revenues it anticipated in 2010.
Flint said it will continue working on other oil sands projects, including the Shell Albian Sands’ expansion, Suncor’s Firebag sulfur plant and StatoilHydro’s Leismer project, noting its facility infrastructure division had an C$800 million backlog of work at the end of 2008.
Flint President Bill Lingard said his company hopes “this is a short run postponement” of Suncor’s projects, adding “We are confident that oil sands development will continue, albeit at a reduced pace.”
Although not directly tied to Suncor, steelmaker Evraz Group confirmed it is laying off 400 employees across Western Canada — 295 in Alberta — because of the slumping demand for steel plates and tubes, largely for the oil and gas sector.
Drop in drilling forecast Calgary-based investment dealer Peters & Co. captured the difficult year ahead for the service sector by forecasting that only 14,500 wells will be drilled in the Western Canada Sedimentary basin and only C$15 billion will be spent on drilling, casing and completion work.
Because of the struggle with restricted access to credit and low commodity prices, Peters & Co. said the majority of operators it covers have planned 2009 capital programs that match their declining cash flow.
As a result, strong balance sheets, proven management teams and exposure to resource plays will be crucial to the survival of service companies, it said.
Gil McGowan, president of the Alberta Federation of Labor, said that although a number of projects are still on the go, the big concern is what will happen when they are finished.
“At this point there is absolutely nothing on the horizon to replace what’s currently under construction,” he told the Globe and Mail. “We’re currently in what I would describe as the afterglow of the boom. The boom itself is over, but the day of reckoning has yet to arrive.”
The Construction Owners Association of Alberta forecast last October that by the second quarter of 2010, 43,000 workers would be needed for 70 projects each carrying a price tag of more than C$100 million. The spending cuts since then have halved that number.
An association spokesman said the message should be a “very sobering” one for industry and government as they face a sharp decline in demand for heavy industrial labor.
Trickledown of 5 to 1 The Canadian Energy Research Institute has calculated that every dollar spent on major oil projects results in $2.50 of trickledown spending in Alberta and another $2.50 in the rest of Canada. Thus, every $10 billion decline in direct energy spending translates into about $60 billion of lost economic activity across Canada.
John Tasdemir, an oilfield service analyst at Tristone Capital, said he expects companies will see earnings decline this year by 50 percent to 80 percent from 2008, leading to bankruptcies.
Compounding his assessment is the fact that shallow drilling that was once Canada’s bread and butter is drying up and disappearing as the industry turns more to horizontal drilling and selective multiple fracture stimulation — wells that are much more expensive to drill and take much longer to drill.
The average time needed to complete a well in Western Canada is up 22 percent since 2002 and 10 percent since 2006, a Peters & Co. report noted.
Even if crude oil prices rebound, the firm believes additional funding will be diverted to international properties.
Andrew Bradford, head of Canadian energy research at Raymond James, is less pessimistic, but still expects earnings to drop 25-30 percent for larger, more mature companies, while noting that 2008 “wasn’t any great shakes either.”
What hasn’t been widely anticipated is just how sharply field activity has already slumped, he told the Financial Post.
An irony in the midst of this gloom occurred during a mid-January weekend when 20 environmental activists and residents from the Athabasca Chipewyan First Nation of northern Alberta, which blames the oil sands for high cancer rates and the destruction of wildlife and fish, took lessons in how to create a human blockade to block oil sands development.
It was one of several seminars being offered as part of a conference hosted by organizations such as Greenpeace, the Sierra Club of Canada and the nationalist Council of Canadians.
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