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Canadian oil sands players on edge Mining projects vulnerable to market turbulence, sliding oil prices; companies without existing operations face greatest threat Gary Park For Petroleum News
The one constant in the Alberta oil sands is volatility, with the latest round of stock market upheaval and nose-diving crude prices threatening the profitability of future projects and billions of investment dollars.
The greatest anxiety surrounds mining projects, where open pit operations strip away the bitumen deposits that are processed into synthetic crude for further refining.
Bob Dunbar, president of Strategy West, an oil sands consulting firm, estimates that a standalone mine needs oil prices in the $80-$100 per barrel range to be economic.
“Those are the kinds of projects that might be jeopardized if investors take a more pessimistic long-term view of oil prices,” he said.
The current pressure is on companies that don’t have existing operations and must rely on access to capital markets, which are in a jittery state at present, Dunbar suggested.
Of less concern are the thermal recovery projects, dominated by steam-assisted gravity drainage technology, which injects steam to melt deep bitumen deposits, allowing them to reach the surface.
They probably need an oil-price threshold of $60-$80 to generate acceptable returns, Dunbar said.
Canadian dollar robust Compounding the numbers problems is the robust Canadian dollar, which has been trading above the U.S. dollar for several months, eating into returns from U.S.-dollar-denominated exports.
If that isn’t enough, the Alberta government has also raised the specter of rising interest rates in Europe and the U.S. — a prospect that currently seems unlikely.
But, just in case, Alberta warned earlier this year that a “rapid increase in interest rates and/or disruptions in financial and credit markets could threaten global trade and investment. The high capital-intensity of Alberta’s oil sands projects leaves Alberta particularly vulnerable to these shocks, as witnessed in 2009.”
Suncor Energy, the largest oil sands producer, reported a foreign-currency charge of $684 million last year.
Adding to the pain has been the growing gap between Canada’s heavier crudes and the U.S. light sweet benchmark West Texas Intermediate which is currently running at a gap of $15 per barrel between Western Canadian Select bitumen and WTI.
The challenge is clear for a company such as Suncor, which posted cash operating costs of C$51 per barrel in the second quarter at a time when it is on the verge of final investment decisions with its joint-venture partner Total involving C$21.6 billion to build the Fort Hills and Joslyn mines and the Voyageur upgrader.
Suncor has already shown it will not proceed in a stormy economic environment by delaying the C$6 billion Voyageur project when the financial meltdown occurred in 2008.
Imperial in homestretch Imperial Oil, owned 69.6 percent by ExxonMobil, has entered the homestretch with construction of the C$10.9 billion first phase of its Kearl mine, which is scheduled to come on line late in 2012 at 110,000 bpd.
Although Kearl’s capital costs have reportedly been climbing, Imperial is refusing to flinch, noting the project is expected to have a lifespan of 40 to 50 years.
Already battered and bruised since January by an explosion and fire at its 110,000 bpd Horizon mine, which had previously been a victim of capital cost overruns, Canadian Natural Resources is resolved not to get caught in a repeat experience.
CNR has so far spent C$1.4 billion on the next phase of Horizon expansion and company President Steve Laut estimates capital spending must be kept under C$100,000 per flowing barrel for the project to be economic at US$80 oil.
If the market for labor and materials starts to overheat, he is blunt: “We will take a time out.”
To prepare for the worst, CNR said its plans for reaching 250,000 bpd of production have been broken up into five major components, which have been further divided into 46 individual projects, which the company can start and stop at its discretion.
By creating smaller components “we are minimizing the chances of constraining capital and maximizing our ability to control costs and adapt to changing market conditions,” Laut said. Juniors especially nervous While the majors can ride out shorter-term storms and take a longer-range view of their investments, junior operators, many of them with little or no independent cash flow, are especially nervous.
Harvest Energy, taken over by Korea National Oil Corp. in late 2009, said its BlackGold thermal project has experienced enough cost and schedule pressure to force the company to evaluate ways to minimize the impact on its plans to deliver its first oil in 2013 and produce 30,000 bpd over 25 years.
When the stock markets took their precipitous plunge on Aug. 8, BlackPearl lost 21.3 percent, Petrobank Energy and Resources was down 16.3 percent, MEG Energy fell 11.5 percent and Athabasca Oil Sands was off 10.8 percent, compared with a 6.9 percent decline for Suncor.
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