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That’s trouble, with a capital T Respected industry executive, rating agency say rising costs set stage for delays in oil sands projects; production forecasts cut Gary Park For Petroleum News
It’s about as official as it could be: The Alberta oil sands are in danger of getting bogged down by escalating labor and materials costs.
When Murray Edwards, one of the most respected minds in the business, and one of Canada’s leading rating agencies issue almost simultaneous warnings there is not much room for doubt.
Edwards, in one of his rare public speeches, said it will be difficult for the Canadian industry to meet forecast growth in oil sands volumes (at least tripling output to more than 3 million barrels per day) over the next 15 years.
In a presentation to a gathering of top business and political leaders in Banff, Alberta, he suggested galloping costs are likely to stall some projects.
Without naming the possible victims, he said the projects he has in mind are all based on long-term oil prices remaining above US$50 per barrel.
Meanwhile, the Dominion Bond Rating Service said inflation in an overheated Alberta labor market is forcing companies to take a more cautious approach to oil sands development than a year ago.
The agency said the demand for materials, equipment and services has created added constraints and hiked costs, with the result that potential project delays have become a more pressing concern.
Study co-author Bob Maxwell told CanWest News that the uncertainty about oil prices and the impact of potential project delays could have a “potential negative impact” on the oil sands, forcing “difficult decisions … regarding project timing and the acceptability of returns.”
High crude oil prices required The report said crude oil must remain “above historic levels … for many of the oil sands development projects to be economical.”
But a strong consensus that, in fact, oil will remain strong through the end of this decade has allowed significant expansion to occur.
“However, the nondiscretionary nature of oil sands capital spending, long leadtimes to first oil production and escalating costs in a highly competitive environment combine to create significant potential financial and execution risk for companies with major oil sands projects, should prices weaken,” the agency warned.
Even so it forecasts that oil sands production could reach 3.7 million bpd by 2020.
The study said that although foreign investment has been attracted from China, South Korea, France, Japan and Britain, it is Canadian-owned firms that have benefited most by seizing the opportunity to get into the oil sands early.
In a parallel report, the group predicted oil sands development will have a major impact on pipeline and refining infrastructure in North America for at least a decade.
It forecasts a “growing shortfall of upgrading capacity relative to oil sands production beyond 2008.”
Rated by many as unmatched among Canadian oil patch deal-makers, Edwards played a pivotal role in turning Canadian Natural Resources from a penny stock into Canada’s second-largest oil and gas producer and was recently singled out by Canadian Natural Chairman Allan Markin for his role in landing Anadarko’s Canadian assets.
Although dubious about the oil sands’ chances of matching the bullish production forecasts, (with some betting on 5 million bpd by 2030), he has an upbeat view of the outlook for oil and gas prices.
Oil could stay above $60 Supply-demand fundamentals could keep oil above $60 for the rest of this decade and gas could average $8 per thousand cubic feet, he said, tying his forecasts in part to the expectations of FirstEnergy Capital.
Among the pitfalls in the oil sands, he said that although the ranks of construction workers have dipped since last year’s peak of 20,000, it could double in 2008, based on a study by the Alberta Construction Association.
That explosion poses a challenge for all players, including Canadian Natural, which aims to complete the first of its three-phase Horizon project in 2008 and grow to 232,000 bpd by 2012.
But Canadian Natural has tried to combat some of the pressures, which have seen project costs double in the past five years, by building an airstrip to handle Boeing 737s at the Horizon site, speeding the arrival and departure of workers from across Canada and is constructing its own school for millwrights.
To date the C$10.8 billion Horizon venture is both slightly under budget and ahead of schedule.
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