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Trimming the sails — Alberta reversals Suncor, Petro-Canada mull cutbacks, deferrals, hold out hope of better times, even in 2009; closure of U.S. refineries predicted Gary Park For Petroleum News
It’s the equivalent of canaries chirping their warning message in coal mines.
Companies of all sizes are involved in what looks like a large-scale reversal of plans to spend C$170 billion in northern Alberta over the coming decade.
The trend is shaping up as the boom that went bust as Suncor Energy, the sector’s second largest producer, and Petro-Canada point to actual and likely spending cuts and project delays.
Suncor Chief Executive Officer Rick George said his company will slash its 2009 spending plans to C$6 billion from an earlier C$9 billion-$10 billion.
He said that could be wound back even more if oil prices settle around US$65-$70 a barrel and credit markets remain frozen in 2009.
The immediate impact is on the planned Voyageur upgrader, designed to raise the company’s total synthetic crude volumes by 200,000 barrels per day to 550,000 bpd.
Stages five and six of Suncor’s Firebag operations are expected to proceed, unless crude prices fall to US$60-$75 per barrel. Chief Financial Officer Ken Alley said he expects crude prices to settle around US$80 in 2009.
George said Suncor’s objective is to “ensure that we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue on our growth path.”
He said that if Firebag stages five and six were delayed, spending in 2009 could be dropped to the C$2 billion needed to keep the basic business functioning.
But George said that would be a draconian step, adding that “if conditions improve, we also have the flexibility to improve and bring on bitumen production quicker.”
He reminded investors that Suncor went ahead in 1998 with its Millennium project when crude prices were US$11 per barrel and faced some doubters then.
“You have to have a lot of faith in this business,” he said. “I like staying as counter-cyclical as I can. So when other people start pulling back capital, it’s actually a time you want to keeping moving forward, even it is takes a little bit of nerve.”
George also said he expects refineries in the United States to be put on the auction block as a result of the financial crisis. “I think there will be some real fire sales. ... We should actually see a number of U.S. refineries shut down.”
Fort Hills deferral possible Petro-Canada, with UTS Energy and Teck Cominco as junior partners, is poised to defer construction of a C$10 billion upgrader connected to their Fort Hills project.
UTS said decision making on the C$23.8 billion venture may be stalled because of “costs, current commodity, equity and credit market conditions.”
Instead, it may limit construction to the mining and extraction portion, whose costs UTS estimates at up to C$15 billion.
“These are certainly turbulent times in the financial markets and although the central banks appear to be making all the rights moves to correct the situation, a follow-up economic slowdown of some magnitude and direction seems likely,” said Petro-Canada Chief Executive Officer Ron Brenneman.
“Clearly one of the things we must decide — if we defer — is how long that might be. If it’s an extended period of time and we’re marketing bitumen, what do the bitumen markets look like and how will that impact the standalone mine situation. We’ve got to pull all that together,” he said.
UTS Chief Executive Officer William Roach said proceeding “prudently” would reduce his company’s overall funding requirements and extend its current funding arrangements into the first quarter of 2010.
“This will allow more time for the equity and debt markets to recover,” he said. “Once we get through this downturn I fully expect a return to the rising demand curve we’ve seen for some time and a return to a supply-driven market.”
Other delays Those developments came on the heels of word from Nexen and OPTI Canada that they will put on hold the second phase of their Long Lake project; backpedalling by Value Creation, which has delayed construction of its upgrader by one to three years; and deferrals by StatoilHydro and Total of their own upgrader plans by two years each.
Pierre Fournier, executive vice president with National Bank Financial, said that “more than anything, the future of the oil sands will depend on U.S. commitments to finance development of the resource and buy the oil,” with the emphasis on U.S. energy independence in the presidential campaign giving every reason to believe the next president will “take aggressive steps to diversify energy sources and stop buying oil from ‘our enemies.’”
But the political opposition in Canada to accelerated development of the oil sands and the resistance to foreign investment, notably from China, present some obstacles, including a threat to national unity, he said.
Fournier suggested that if the private sector is unwilling or unable to guarantee large-scale development of the oil sands over the long run, “major multibillion-dollar bilateral agreements between the U.S., Canada and the producing provinces seem likely.”
“The options would include guaranteed long-term contracts at fixed prices, investments in technology to enhance output, reduce costs and carbon emissions, as well as subsidies and various fiscal incentives,” he said.
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