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Jangled nerves in oil sands Shell Canada latest major to shelve project, relegating Pierre River to long-term opportunity, responding to directives to cut costs Gary Park For Petroleum News
Probably more than any other sector in the petroleum industry, the Alberta oil sands requires its participants to have a combination of nerve, vision and deep pockets.
Less than a year ago, when oil prices had seemingly settled around US$90-US$100 per barrel for the long haul, the element of risk seemed to be under control.
Then the price swoon made its first appearance around mid-2014 and quickly raced towards the US$40 level, undermining C$340 billion in oil sands capital spending.
Now the focus on what is widely regarded as the costliest crude play in the world has shifted to layoffs and budget cuts that, in turn, are resulting in cut-throat competition in the defenseless service and supply business.
Analysts says US$47 breakeven A recent study by TD Securities placed the average breakeven crude price for the oil sands at US$47 a barrel.
But the C$13.5 billion Fort Hills oil sands mining partnership of Suncor Energy, Total and Teck Resources has indicated it needs oil prices above US$90 to cover capital pay-offs and generate an acceptable rate of return, said BMO Nesbitt Burns. And the US$90 figure is based on calculations of oil prices rebounding and remaining firm.
Apparently a growing number of oil sands players are losing their nerve.
Although construction at Fort Hills is continuing, largely because of the investment already made in steel and long lead-time equipment, more companies have decided to scramble on the lifeboats.
Shell withdraws application Leading that field is oil sands veteran Shell Canada, which announced Feb. 23 that it is withdrawing a regulatory application for its proposed 200,000 barrels per day Pierre River mine that has traveled a bumpy road after postponing plans to start production in 2010.
The project “remains a very long-term opportunity for us, but it’s not currently a priority,” said Lorraine Mitchelmore, president of Shell’s Canadian unit.
“Our current focus is on making our heavy oil business as economically and environmentally competitive as possible.”
The company noted it already holds regulatory approvals to more than double its existing oil sands production from 255,000 bpd.
Even Shell’s established Albian Sands bitumen project is not safe from the budget axe, with word earlier this year that 300 jobs would be cut.
Mitchelmore hinted last August that the oil sands outlook for Shell was turning grim, with new Royal Dutch Shell Chief Executive Officer Ben van Beurden ordering global business units to cut costs and enhance productivity as they competed for limited capital investment dollars.
Pierre River received regulatory approval in 2007 at the same time as Shell’s 100,000 bpd Jackpine mine expansion, which got a go-ahead in 2013, but has yet to be sanctioned by its partnership of Shell, Chevron Canada and Marathon Oil.
Northern Alberta’s Athabasca Chipewyan First Nation, which has long been an opponent of Shell operations, welcomed the Pierre River decision saying it was a “clear sign that oil sands development is no longer business as usual.”
“Now more than ever we can see the serious economic, environmental and treaty rights issues in the region are affecting the status quo of business,” the First Nation said.
Other project delays The Pierre River announcement coincided with word from oil sands newcomer Laricina Energy, a privately owned company that has the Canada Pension Plan Investment Board as its largest single shareholder at 15.3 percent.
Laricina said it has shut down its Germain commercial demonstration project with 389 million barrels of bitumen reserves and halted planning for its joint venture 10,700 bpd, C$520 million Saleski project, having failed to secure financing.
Privately owned Osum Oil Sands, a 40 percent partner in Saleski, will wait for oil prices to stabilize before choosing “the right options to move forward,” company Chief Executive Officer Steve Spence said.
Osum is earning positive cash flow from its Orion oil sands project in Cold Lake, which it bought from Shell last year for C$325 million to gain 8,000 bpd of production.
Laricina warned in January that it might not be able to last as a “going concern” because it has been in default since the end of 2014 on a C$150 million issue of notes to the pension plan board.
Matti Teittinen, an analyst with consulting firm IHS, said oil sands companies have been feeling the pinch for the past few years as investors moved to U.S. shale oil plays and the drop in oil prices has made the outlook worse for smaller firms, who are unable to find white knights because of Canadian limits on investment by state-owned foreign enterprises.
In its latest forecast, the Canadian Association of Petroleum Producers has estimated capital spending in the oil sands this year will total C$25 billion, down C$8 billion from last year.
Before Shell’s move, Suncor Energy cut its workforce by 1,000 and its budget by C$1 billion; Cenovus Energy trimmed C$700 million out of its 2015 spending; Canadian Natural Resources reduced its oil sands and conventional spending plans by C$2.4 billion; and junior company Southern Pacific Resource filed for court protection following an unsuccessful review of its strategic alternatives.
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