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Canadian oil and gas giants tread warily New-look Suncor and EnCana roll out disciplined 2010 spending plans, leaving flexibility to boost budgets if commodity prices rise Gary Park For Petroleum News
While trading places as Canada’s dominant oil and natural company, Suncor Energy and EnCana are both delivering a similar refrain for 2010 — steady as it goes.
Suncor is the new king of the hill after its takeover of Petro-Canada, aided by EnCana’s decision to relinquish its once-treasured No. 1 spot in production and market value to create two independent publicly traded entities (a new EnCana to focus on natural gas and Cenovus, to run an integrated oil business) that are expected to take flight Nov. 30.
In rolling out their capital budgets for next year, they set the stage for a new generation of upstream growth that tries to avoid a repetition of what Suncor Chief Executive Officer Rick George describes as the “firestorm of inflation” that crippled many oil sands projects earlier this decade.
Suncor: Focus on Firebag For Suncor, that means a heavy concentration on its existing in-situ Firebag operation by restarting Firebag 3 and a kick start for Firebag 4 to introduce another 136,000 barrels per day of production by the end of 2012.
Those are the key underpinnings of Suncor’s commitment when it swallowed Petro-Canada to become a company dominated by the oil sands.
George, in declaring that Suncor has officially “restarted growth in the oil sands,” said the company’s goal is 10 percent to 12 percent average annual growth in output over the next decade, starting with 350,000 bpd at the end of 2010.
Suncor’s overall capital spending for the period will average about C$6 billion a year, kicking off at C$5.5 billion in 2010, which George estimates is about C$2.5 billion lower than if the merged companies had remained separate entities.
EnCana boosting gas output For its post-split existence, the new EnCana expects to spend $3.6 billion to $3.9 billion in 2010 to boost gas output by about 10 percent to 3.64 billion cubic feet per day, while Cenovus has a budget of $2 billion-$2.3 billion, concentrated on increased development at its in-situ Foster Creek and Christina Lake oil sands operations, where 2010 production growth is targeted at 15 percent to 20 percent. (Figures for both companies are in U.S. dollars.)
For Cenovus that translates into 42,000-44,000 bpd at Foster Creek and 7,000-7,500 bpd at Christina Lake, which is expected to add another 40,000 bpd after it comes on stream in late 2011.
In addition, regulatory applications have been filed for three more Christina Lake phases of 40,000 bpd each to reach an eventual goal of 200,000 bpd.
Randy Eresman, who will remain chief executive officer of EnCana, said the goal is to remain the lowest-cost gas producer in North America, but the two new executive teams are poised to “respond quickly to changing economic and investment circumstances” by working a high level of flexibility into their budgets.
He said the spending plans will be further updated once the new entities are able to refine their strategies.
Firebag re-booted In re-booting Firebag, Suncor has made it clear that operation is where its current focus lies.
To set the ball rolling again on Firebag 3, after calling a halt in 2008 when the economic downturn struck, Suncor has budgeted C$900 million for 2010 to complete the C$3 billion phase, and will invest C$50 million on Firebag 4, which has a price tag of about C$2 billion.
George forecast that, following expected asset sales of C$2 billion to C$4 billion next year, 65 percent of Suncor’s cash flow will come from the oil sands and 35 percent from other operations (predominantly those inherited from Petro-Canada), compared with the current 50-50 split.
He emphasized that the oil sands account for 22 billion of Suncor’s total resources of 26 billion barrels, which is “very different from the rest of the industry,” and underpins the corporate goal of “execution rather than exploration.”
No timetable for expansion George conceded there would be disappointment that Suncor is not prepared to set a timetable for reviving the C$26 billion expansion of Voyageur to handle 200,000 bpd of bitumen and the C$23 billion Fort Hills mine, designed to produce 140,000 bpd, with Teck Cominco and UTS Energy each holding 20 percent.
He said the prevailing light-heavy oil price differentials “do not support growing our Voyageur upgrader. So our plan is to (concentrate on bitumen production).”
“But I do see the upgrader as a great option for us down the road, at some point.”
To that end, he indicated, Suncor might be open to taking on a partner for Voyageur, without dropping its share of capacity below 100,000 bpd.
He said about C$3 billion has so far been spent on Voyageur and the project can be kept in a “safe mode” for another two or three years. If work is resumed it would take about 30 months to complete, he said.
Fort Hills dialogue Adamant that Suncor is not abandoning Fort Hills, George said “it’s hard for us to see project economics beating Firebag 3 or 4 or other projects that we have in the near term.”
He said Suncor is keeping an “open dialogue with Teck and UTS,” but was not aware of any plans Teck might have to independently move ahead on Fort Hills.
“What I will promise you is we will be very focused on doing what is right for our shareholders, not for every shareholder out there,” he said.
UTS Chief Executive Officer Will Roach said Fort Hills, although left in the uncertain category, is “absolutely essential” if Suncor is to hit its production targets by 2020.
If work does resume on Voyageur or Fort Hills, that spending would be additional to the average C$6 billion annual budget for the next decade, John Rogers, vice president of investor relations, told analysts.
In the current environment, George said the capital savings resulting from the merger should be greater than the anticipated C$1 billion a year.
But, even if oil prices rise above Suncor’s mid-cycle range of $70 per barrel, Suncor will not “go back to the world where we were making C$10 billion project commitments upfront, then having to pull back,” George said.
Water intake to be reduced Always mindful of its pledge to improve its environmental performance, Suncor said it aims by 2015 to reduce water intake at the oil sands by 12 percent, increase land reclamations by 100 percent, improve energy efficiency per barrel produced by 10 percent and reduce current air emissions of sulfur, nitrogen and volatile organic compounds by 10 percent.
The company said its oil sands carbon dioxide intensity has been reduced by almost half since 1990; water consumption by barrel has been lowered by 40 percent since 2002; 90 percent of water is recycled at its in-situ operations; and almost 2,500 acres of disturbed land have been reclaimed.
Andrew Potter, an analyst with UBS Securities, said Suncor appears to have dropped its economic threshold for oil sands expansion to oil prices of $50 per barrel from $80, in light of which the 2010 budget is “conservative,” given his expectation that Suncor might invest C$6.5 billion.
Justin Bouchard, an analyst with Raymond James, was expecting a clear direction on Voyageur and Fort Hills, although the company’s decision to slash spending in late 2008 and early 2009 likely prompted it to take a cautious line.
“On the flip side, they could always ramp spending up if oil prices stay where they are or rally higher,” he said.
Bouchard said that if oil prices were to reach $120 three months from now, he is not so certain that Suncor’s message of capital discipline would hold up.
EnCana focused on shale
The new EnCana is earmarking its major investments on early stage opportunities in the Haynesville shale of Texas and Louisiana, the Horn River shale play in British Columbia and completion of its Deep Panuke gas project offshore Nova Scotia, with other unspecified projects on the waiting list if gas prices improve.
It plans to spend $1.9 billion on its U.S. division, boosting output by 16 percent to 1.8 billion cubic feet per day, with close to 40 percent assigned to production growth and land retention at Haynesville.
The Canadian division will receive $1.6 billion, but production will remain largely unchanged because of sales this year of noncore assets and price-sensitive royalties in Alberta.
EnCana shut-in 500 million cubic feet per day of gas when prices dropped, lowering production through 2009 by an average 320 million cubic feet per day. Those volumes are scheduled to come back on stream this winter.
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