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Serenity masks oil sands unease Dive in oil prices puts project economics under microscope; analysts say operators could be forced to put projects on back burner Gary Park For Petroleum News
On the surface, it appears like business as usual in the Alberta oil sands.
Cenovus Energy has received approval from regulators for the initial 45,000 barrels per day phase of a 130,000 bpd project at its Narrow Lakes lease — its third thermal recovery operation.
BlackPearl Resources launched the regulatory process for its Blackrod project, seeking approval for an 80,000 bpd thermal venture, starting at 20,000 bpd.
Nothing unusual. Just the normal steady stream of new developments working their way toward construction starts.
But both raised questions about the industry’s ability to push ahead as falling oil prices have started to push the oil sands closer to their economic development threshold.
Cenovus, in partnership with ConocoPhillips, hinted at its concern by delaying the scheduled start of first oil from Narrows Lake to 2017 from 2016, saying that depended on “industry activity and the associated demand for labor and materials.”
A company spokeswoman said some inflation is anticipated “so there’s no need for us to rush into it right now,” even though Cenovus is targeting a doubling of its net asset value over the 2010-15 period.
Analysts see unease However, analysts were less constrained, suggesting the slowdown for Narrows Lake points to unease as the sector prepares for work to start in 2015 on a wave of new projects and expansions.
Andrew Potter, with CIBC World Markets, said the one-year delay is “not overly significant (but) the fact that the best operator with the best projects is somewhat cautious on timing is a negative read through the industry.”
The announcement coincided with a report from the Petroleum Human Resources Council of Canada that at least 6,000 more workers will be needed for oil sands construction within three years.
Randy Ollenberger, managing director of BMO Capital Markets, estimated the first phase of Narrows Lake will cost about C$30,000-C$32,000 per flowing barrel, pointing to a cost estimate of C$1.2 billion-C$1.28 billion — although the partners have not released cost projections.
Options for capital BlackPearl added its own cautionary note about the C$800 million first phase for Blackrod, which company President John Festival said will likely come on stream in about four years, assuming regulatory approval within 18 to 24 months.
He said BlackPearl has several options for raising the capital needed — equity, debt and selling some non-core properties to cover costs of about C$100 million a year — but hedged his bets by leaving the prospect of a partnership on the table.
Jeff Martin, an analyst with Peters & Co., agreed BlackPearl has a “large degree of financial flexibility” to raise the capital, but added a “financing decision could easily be delayed without compromising the timelines.”
However, while Cenovus and BlackPearl embark on their ventures, there is a growing list of opportunities being dangled in front of potential bidders.
The latest is Koch Industries, which has set an Aug. 9 deadline for bids on stakes in six properties covering 220,000 net acres, with total bitumen-in-place estimated at more than 8 billion barrels, with 2.9 billion barrels rated as recoverable from total production of 300,000 bpd.
Koch, owned by the billionaire Koch brothers, has previously backed away from the oil sands.
In 2003 it decided against proceeding with the Fort Hills mining project after years of study and engineering work. That asset is now owned by Suncor Energy and France’s Total.
Other assets being marketed include offerings from ConocoPhillips and Royal Dutch Shell.
Search for white knights But the search for white knights generated a note from Potter to investors titled “Fear and loathing in the oil patch,” warning that the month-long erosion of West Texas Intermediate prices is putting many possible deals on ice.
“The volatility in oil prices may make it more difficult for companies to complete deals (asset sales, joint ventures, corporate sales),” he said.
Potter said the biggest challenge faces Connacher Oil & Gas, which owns an Alberta thermal oil sands project, a heavy oil refinery in Montana and conventional properties and is reviewing its strategic alternatives after an executive shake-up.
Samir Kayande, an analyst at IGT Investment Research, said Connacher’s struggles could force it to shut in production, which averaged 12,400 bpd in the first quarter.
The oil price plunge and a glut of crude has promoted Wood Mackenzie, a global research consultant, to suggest the oil sands sector may be forced to put some projects on the back burner.
“Oil sands projects display some of the highest breakevens of all global upstream projects,” the firm said. “The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects.”
During the 2008-09 recession more than C$80 billion worth of projects were shelved, amended or cancelled when oil plunged below US$40 per barrel and corporate credit evaporated.
Wood Mackenzie noted that 16 bitumen projects are now scheduled for start up by 2016, adding a combined 1 million bpd of incremental production.
But the sector is faced with mounting concerns, including high demand for skilled labor, congested pipelines to the United States markets and competition for pipeline space.
The report said there is “little scope to adjust near-term production, due to the amount of capital already sunk. However, if the external environment proves to be unattractive, companies do have the option to significantly change their longer-term production outlook.”
Wood Mackenzie included Cenovus’ Narrow Lakes along with Canadian natural Resources’ Horizon, and the Fort Hills and Joslyn projects by the Suncor-Total partnership on the list of schemes that are “prone to delay.”
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