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Vol. 15, No. 19 Week of May 09, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

More ups than downs in oil sands

Shell uneasy about inflation, Nexen may delay upgrader; reactivation dominates picture in northern Alberta as BP sets bold target

Gary Park

For Petroleum News

The Alberta oil sands dynamic is operating under a full head of steam, with a mixture of hirings, financings, bold forecasts and both actual and possible project delays.

Perhaps the most confusion was created by Royal Dutch Shell, which listed oil sands production as a key contributor to better-than-expected first-quarter profits of US$4.9 billion, included a 100,000 barrels-per-day expansion in its next bundle of startup projects, but said other major ventures will be delayed until after 2015 while the global giant squeezes whatever it can from existing facilities.

Shell’s Chief Financial Officer Simon Henry told a conference call that that the major addition to the Athabasca Oil Sands Project, which yielded 72,000 bpd in the first quarter, is a frontline venture along with two natural gas projects in Qatar to support further production growth.

“These projects are on track and will underpin our growth across 2011-2012,” he said.

Expansions on hold

At almost the same time, Marvin Odum, the head of Shell’s Americas operation, said the capital costs of oil sands projects are so high, expansion plans will remain on hold for at least five years.

That includes adding a further 30,000 to 80,000 bpd to AOSP existing output, which is targeted to hit 255,000 bpd later this year, with Chevron and Marathon Oil each holding a 20 percent stake.

“We certainly have seen the cost environment in Alberta go up considerably,” he told the Globe and mail’s editorial board. “We see the ability for lower investment levels to bring more production on line over the next four, five, six years.”

The first 155,000 bpd AOSP has been a money spinner for Shell, generating per-barrel profits 66 percent higher than other producing assets and paying out its capital investment in just five years at oil prices of mid-US$50.

However, Odum said Shell’s internal forecasts require US$70-$75 to turn a profit in the oil sands.

He would only commit Shell to “watch the market and see when is the next time to start a major expansion in the oil sands.”

Odum said Shell supports proposals by both Enbridge and Kinder Morgan to build pipeline capacity from Alberta to the British Columbia coast for export to Asia.

“Typically the more options you have for distribution of your product the better,” he said.

Meanwhile, BP, which has faced strong investor opposition to its presence in the oil sands, said it is targeting more than 1 billion barrels of recoverable resource following its acquisition of Value Creation’s Terre de Grace.

The two companies formed a partnership in April to explore and develop the acreage, which a BP spokesman called a “high-quality resource.”

BP has agreed to pay US$900 million for the interest, with US$500 million paid in cash, matching what the company received for the sale of its 50 percent stake in the Kirby oil sands interests to Devon Energy.

Nexen working Long Lake

Canadian independent Nexen shows signs of shaking off initial hiccups at its year-old Long Lake project, raising output to 19,000 bpd in the first quarter, 25,000 bpd at present and 40,000-60,000 bpd by the end of 2010. Capacity is 72,000 bpd.

Company executives said 25,000 bpd puts Long Lake close to an economic breakeven point, adding that the company anticipates operating costs of C$20-$25 per barrel as output ramps up.

Chief Executive Officer Marvin Romanow said work is progressing on Phase 2 of Long Lake, including engineering on both the production and upgrader portions, although the upgrader could be delayed.

He said the controversy the oil sands is attracting should be handled through communication with stakeholders, given that the issue will be “in front of me and the company for the foreseeable future.”

Romanow said Nexen is committed to engaging with all its “constituents” and presenting the facts.

Husky Energy, which has a 50-50 joint venture with BP in the upstream and downstream end of oil sands operations, said it is hiring workers for its proposed 200,000 bpd Sunrise project, even though a sanctioning decision is not expected until later this year.

The company said major contracts have been awarded for the first phase, expected to cost C$2.5 billion.

Commercial operation in sight

A major breakthrough, after three decades of probing and pondering, has set the stage for a significant advance in Japanese-controlled oil sands production.

Japan Canada Oil Sands, a unit of Japan Petroleum Exploration, has filed an application with Alberta regulators to add 25,000 to 35,000 bpd of output at its Hangingstone thermal recovery project, with Nexen as a 25 percent partner. The site currently produces 7,000 bpd of bitumen.

JAPEX said that if approvals are obtained, construction of a full-scale commercial operation will start in the 2011-12 winter, with oil flowing by the end of 2014.

At the junior end of the scale, Southern Pacific Resources has entered into an agreement with a syndicate of seven underwriters, co-led by BMO Capital markets and TD Securities, to sell 84 million shares at C$1.20 each for gross proceeds of C$100.8 million. The underwriters can also exercise an option to acquire another C$15.12 million worth of shares.

The net proceeds will be used to complete the equity funding portion of its second thermal recovery project, which is expected to gain regulatory approval before September.

But this latest round of optimism has been tempered by Thierry Pilenko, chief executive officer of Paris-based services company Technip, who said protests against the oil sands are making it harder for companies to obtain permits just as oil prices are making the resource more economic.

“Don’t expect an oil sands rush as we saw three or four years ago,” he said, adding Technip’s customers in Canada will look “very, very” carefully at costs and the resources before they proceed with large projects.

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