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Oil sands: Kearl the pearl Imperial, Exxon break sands freeze, approve first phase of development Gary Park For Petroleum News
Seldom a company to drop broad or even little hints about any of its plans, Imperial Oil did everything short of leading a waiting world to its inner sanctums over recent months even while it was pointing conclusively to corporate approval of its Kearl Lake oil sands project.
Thus, the inevitable happened May 25 when Imperial (69.6 percent owned by ExxonMobil) and ExxonMobil announced they would go ahead with the C$8 billion initial phase of Kearl. Imperial will be operator with a 71 percent stake and ExxonMobil will hold the balance.
If all goes according to plan, Kearl will come on stream with capacity of 110,000 barrels a day in 2012, grow over time to 345,000 bpd and have an operating life of almost 50 years as a 4.6 billion barrel bitumen resource is mined out.
It’s the culmination of four years’ preparation and an investment of C$800 million.
Imperial Chief Executive Officer Bruce March described the undertaking as “the biggest single investment the company has ever made in a pretty volatile period.”
In moving against the flow, which has seen 13 oil sands projects worth about C$90 billion either cancelled or delayed over the past nine months, Imperial has jolted the oil sands back to life.
On the cusp? Robin Mann, chief executive officer of AJM Petroleum Consultants, wasn’t quite ready to declare that the oil sands have regained full health.
“But I think we’re on the cusp,” he told the Globe and Mail.
A spokesman for rival producer Suncor Energy was even more emphatic, declaring “It’s a matter of when, not if” his company revives its own sidelined projects, some of which will go into a larger mix if the anticipated second-half merger with Petro-Canada is completed.
Will Roach, chief executive officer of UTS Energy, which owns 20 percent of Petro-Canada’s proposed Fort Hills project, sees the Kearl decision as evidence that imminent environmental regulations affecting the oil sands are seen by ExxonMobil as manageable and will not impede the company’s ability to achieve its financial objectives.
Andrew Potter, an analyst with UBS Securities, estimates Kearl will need oil prices of US$70 per barrel to be profitable; William lacey, of FirstEnergy Capital, puts the threshold at US$80.
Potter calculates the C$8 billion first-phase costs average out at C$73,000 per flowing barrel, more than the C$6.6 billion and C$60,000 per barrel he had anticipated.
But he said “Now is the time to build” when Imperial is in such a strong financial position, with virtually no debt.
Lacey said the company entered 2009 with C$2 billion cash in hand and is in a position to cover project costs from internal cash flow without needing help from capital markets.
Even if oil slips to US$50 per barrel, the company could likely buy back 2-3 percent of its shares and still finance the development with internal funding.
Tristone Capital analyst Chris Feltin said Imperial can “execute on a major project in an environment where costs look to be trending down” and could come in below C$8 billion “if they are able to lock in even lower rates than they are estimating now.”
A billion may have been saved March told an investor conference May 26 the partners may have saved up to C$1 billion by stalling corporate sanctioning and taking advantage of a downturn in costs since late 2008.
In the process it has determined that operating costs will be “substantially lower” than previously anticipated.
Other oil sands proponents, such as Suncor, Petro-Canada and Canadian Natural Resources, report that contractors and suppliers are now more willing to renegotiate deals, while the Alberta shortage of construction labor has eased.
Alberta Energy Minister Mel Knight said the Karl decision points to renewed interest in the oil sands.
He said companies have been able to use recent months to re-examine their costs and “determine whether or not their projects are now at the right time to move forward.”
March said initial bitumen production will be upgraded at the company’s two refineries in Ontario, followed by sales to upgraders in Alberta.
Production could also go to other Alberta upgraders, followed by markets in the U.S. Midwest and Gulf Coast, where diluted bitumen from Kearl would fit well with refineries designed to run heavy Mayan crudes from Mexico.
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