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Oil sands face unknown Production targets scaled back as companies cut back expansion plans in ‘very troubled industry’; Shell takes C$2 billion write-down GARY PARK For Petroleum News
Looking out over the horizon, Calgary-based investment dealer Peters & Co. can see only two waves of increased oil sands production. Beyond that, nothing.
In fact, the pullback in the northern Alberta bitumen region is turning into a pullout.
Royal Dutch Shell has joined the growing list of majors - notably Cenovus Energy, Canadian Natural Resources, ConocoPhillips, Norway’s Statoil and France’s Total - in scrapping projects, regardless of the cost.
The Anglo-Dutch company has halted construction on its 80,000 barrels per day Carmon Creek project in the Peace River region of northwestern Alberta, disclosing that the move will result in a US$2 billion charge on its third-quarter results and de-booking of 418 million barrels of proved reserves.
Shell said it will retain the leases and preserve some equipment while studying options for the asset, which usually means erecting a “For Sale” sign.
It said the collapse of oil prices and lack of pipeline capacity to move crude bitumen out of Alberta combined with one of the most expensive production zones in the world, has forced its hand.
Pierre River mothballed earlier That closely followed Shell’s decision earlier this year to mothball its Pierre River 200,000 bpd oil sands mine to cope with plunging commodity prices.
“We are making changes to Shell’s portfolio mix by reviewing our longer-term upstream options world-wide and managing affordability and exposure in the current world of lower oil prices,” said Chief Executive Officer Ben van Beurden. “This is forcing tough choices at Shell.”
Just six months ago, Shell said first production from Carmon Creek would be delayed for two years to 2019 by rephrasing capital spending on the C$3 billion venture which was designed to inject steam through vertical wells to melt bitumen and force it to the surface.
However, at that time a company spokesman said Carmon Creek remained a “priority for Shell and we’re continuing to advance the project.”
He said Shell was early enough in the schedule to “make adjustments to ensure the long-term competitiveness of a project that will ultimately have a lifespan of more than 30 years.”
So much for that optimism.
But Shell remains 60 percent operator, with Chevron Canada and Marathon Oil each holding 20 percent, of the Athabasca Oil Sands Project, which has capacity of 255,000 bpd.
Another setback The Carmon Creek move was accompanied by another setback in the oil sands, with MEG Energy (16.7 percent of which is owned by China National Offshore Oil Corp.) cutting its 2015 capital spending after reporting a worse-than-expected third quarter operating loss.
Although the pure-play oil sands company posted an 8.2 percent increase in production to 82,768 bpd, its realized bitumen prices tumbled 52.3 percent to US$31.03 per barrel from a year earlier, while its net loss dropped to C$428 million from C$101 million.
What the sector is left with, according to Peters & Co., is two phases of expansion:
1) The second stage of the Kearl project owned by Imperial Oil and ExxonMobil; the first stage of the Sunrise project owned by Husky Energy and BP; and the second phase of the Surmont joint venture by ConocoPhillips and Total.
2) The launch of the Fort Hills mine operated by Suncor Energy; and two more phases of Canadian Natural’s Horizon project.
The firm predicted output will grow to 2.75 million bpd by 2020 - short of earlier forecasts by about 600,000 bpd and far from the 5 million-6 million bpd once targeted by the industry - from 2.1 million bpd today.
Rafi Tahmazian, senior portfolio manager at Canoe Financial, told the Financial Post that “any projects that were planned but not implemented are definitely dead. It’s just a very troubled industry.”
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