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North America's Source for Oil and Gas News
September 2002

Vol. 7, No. 39 Week of September 29, 2002

Kyoto Protocol cited as Alberta oil sands project scaled back

Gary Park, PNA Canadian correspondent

The first casualty on Canada’s Kyoto battlefield was widely expected to be the Alberta oil sands — identified by environmentalists as the Climate Change Culprit.

And the initial wounds seem to have been inflicted against a background warning by Alberta Energy Minister Murray Smith on Sept. 20 that the Kyoto Protocol could wipe out up to C$10 billion in future oil sands investment.

TrueNorth Energy L.P., the Canadian unit of privately held U.S. energy giant Koch Industries Inc., has slashed its fourth-quarter spending plans by 75 percent, or C$14 million, largely blaming the unanswered questions on the impact of Kyoto, if Canada goes ahead with full implementation.

“I think we’re going to see more and more stuff like this,” said Brian Prokop, an analyst with Peters & Co. in Calgary, reacting to the first specific budget cuts in the oil sands sector after other oil sands players such as Imperial Oil Ltd., Nexen Inc., Petro-Canada, Western Oil Sands Inc. and Canadian Oil Sands Trust have warned of Kyoto’s possible consequences.

Regulatory delays stall C$3.5 billion project

TrueNorth also cited delays in the Alberta regulatory process, which have stalled detailed engineering work on the C$3.5 billion, 190,000-barrel-per-day Fort Hills project being developed by TrueNorth, as 78 percent operator, and UTS Energy Corp.

“We are very concerned that Kyoto, if ratified and implemented in a not very thoughtful manner, could kill the project,” TrueNorth President David Park said Sept. 19.

He said TrueNorth has estimated the climate change pact could add between 15 cents and $1.50 per barrel to oil sands operating costs. Some have put the price tag at $3 a barrel.

But even at $1.50, the impact would be “lethal” for Fort Hills, said Park.

Having made national headlines as the first major energy project to warn that it could fall under Kyoto, Park softened the message the next day, saying “Kyoto is just one of a number of risks,” which extend to cost overruns and tough environmental opposition.

However, TrueNorth Vice President D’Arcy Levesque said Kyoto “right now is a big uncertainty for many companies and many projects.”

Potential partners concerned

He said the uncertainties have posed problems for Fort Hills in seeking additional partners for a scheme designed to tap 2.8 billion barrels of reserves.

“A number of people have expressed interest ... but, not unlike ourselves, they?re concerned about any potential costs associated with regulatory approval and any potential costs associated with Kyoto,” he said. The steps taken by TrueNorth are “just prudent cost and risk management to try and understand the implications of Kyoto on our project,” he said, although some analysts have suggested that Koch was never fully committed to the oil sands and may have decided to look for other sources of heavy oil to feed its U.S. refinery facilities.

The regulatory approval, expected by mid-October from the Alberta Energy and Utilities Board, is dragging behind schedule.

Environmentalists also a factor

An environmental coalition told the board in July that Fort Hills could affect 98 percent of a wetlands area, endangering plant species and migratory bird habitat.

Levesque told the regulator the claim was “misleading,” and came from a group that has “publicly indicated on a number of occasions that they are opposed to oil sands development in any form.”

The Pembina Institute for Appropriate Development, a member of the coalition, said last month that rapid expansion of the oil sands could put Alberta at risk of being “penalized and marginalized” under the federal government’s Kyoto strategy.

The institute, in an earlier report, said that if all Alberta oil sands and coal-fired power-generating projects proceed the province’s emissions could rise 64 percent above 1990 levels — the baseline year for Kyoto’s reduction targets.

It advocated that no new oil sands projects should be approved unless companies could offset 100 percent of their greenhouse gas emissions — a policy that would require producing companies to purchase emissions “credits” on the domestic or international markets.

TrueNorth said Fort Hills is being designed to cut greenhouse gas emissions by half compared with existing plants. Canada’s National Energy Board has estimated that its takes 50 barrels of conventional crude output to generate 1 tonne of carbon dioxide, while just eight barrels of oil sands output will produce the same quantity of greenhouse gases.

The Kyoto fear-factor has extended to other U.S.-based independents who have recently entered the Canadian market.

ConocoPhillips Canada, through the Gulf Canada Resources Ltd. assets it acquired last year, and Devon Energy Corp. both have major oil sands interests that they will continue to develop.

But a long list of others — Apache Canada Ltd., Burlington Resources Canada Energy Ltd., Anadarko Canada Corp., Marathon Canada Ltd. and Dominion Exploration Canada Ltd. — say they have no intention of reaching beyond their existing operations into the oil sands.

Apache Canada President Floyd Price said his company has no reason to consider the high-cost sector because it has no expertise in the field and is deterred by the uncertainties of Kyoto.

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