Total, the French multinational, and Suncor Energy, Canada’s largest oil and gas producers, are creating a strategic partnership to sink tens of billions of dollars into oil sands development over the next decade, demonstrating that the days of mega-projects are far from gone, despite fears about another round of cost inflation in northern Alberta.
The blockbuster deal will give fresh impetus to projects that were either advancing at a carefully measured pace or stalled.
The action list involves spending C$9.6 billion on the 160,000 barrels-per-day Fort Hills project (previously spearheaded by Petro-Canada before its takeover by Suncor), with first oil scheduled for 2016; C$6 billion on the Joslyn mine, targeting first oil in 2017 and eventual output of 100,000 bpd; and reviving the Voyageur upgrader project, which was suspended in 2008 when cost estimates spiraled to C$23 billion. Voyageur now carries a price tag of C$11.6 billion and will get an early C$6 billion infusion to start converting bitumen into synthetic crude in 2016 and grow to capacity of 200,000 bpd.
The agreement means Total will no longer proceed with planned construction of a 295,000 bpd upgrader near Edmonton, opting instead to joint Suncor’s Voyageur project near Fort McMurray.
Ownership breakdownAfter closure of the deal, the ownership breakdown will be:
Fort Hills — Suncor 40.8 percent, Total 39.2 percent and Teck Resources 20 percent;
Joslyn — Total 38.25 percent, Suncor 26.75 percent, Occidental Petroleum 15 percent and Japan’s Inpex Canada 10 percent; and
Voyageur — Suncor 51 percent, Total 49 percent.
Total alone is expected to spend C$20 billion on the projects by 2010, boosting its Alberta workforce to 1,400 from 250, while Suncor, which will gain C$1.75 billion in cash from the transactions, projects its spending at C$8 billion to C$9.5 billion between 2012 and 2014 as it targets 8 percent annual growth in its oil output over the next decade.
“The oil sands is the second largest oil base in the world (after Saudi Arabia) and we’re the premier developer. So this, I think, is a vote of confidence,” said Suncor Chief Executive Officer Rick George.
He told a conference call that the deal is a “directional shift” for Suncor, which has until now been a “100 percent, go-it-alone kind of company.”
However, George said shareholders should benefit from reduced risk, increased return on capital and the opportunity to monetize reserves faster.
Jean-Michel Gires, president of Total E&P Canada, said the partnership is “all good news” for Alberta’s capacity to promote development of its oil sands resource.
He said the changed upgrader approach will bring the facility closer to the producing assets of both companies and allow them to share the costs and risk management.
Looming labor crunchFor all of the superlatives, there is a degree of unease around the sidelines as the two companies embark on such ambitious spending plans.
Money is already flooding back into the oil sands from companies such as Imperial Oil, a Husky Energy-BP alliance, Syncrude Canada and Canadian Natural Resources, causing major engineering and construction firms to warn of a looming labor crunch.
George acknowledged those concerns, saying “the biggest risk, the biggest challenge, is to get enough manpower on these projects.”
To ease the pressure Suncor has structured each project to reduce peak labor needs to 4,000, compared with 7,000 in the past, and has started building a larger portion of components off-site while asking contractors to carry more of the inflation risk.
George said the merger with Petro-Canada and the partnership with Total reduces the number of players and gives Suncor more control over how much work is done and when.
Phil Skolnick, managing director of equity research at Canaccord Genuity, was not so sanguine, insisting the labor demand in 2012 and 2013 will “be a mess again, no doubt.”
He said not everyone can accelerate or bring forward value from joint ventures. “We know that. We’ve seen it before.”
Alberta Energy Minister Ron Liepert welcomed the planned staging of projects, saying that is a big step forward from six years ago when three projects were under construction at the same time.