Oil sands battle adversity

Market access problems, threats of steeper carbon taxes fail to deter expansions, projects; Chinese stakeholders have full agendas

Gary Park

For Petroleum News

Faced with delays in building new pipelines and opening new markets, a looming shortage of upgrading facilities, talk of hiking carbon taxes and stigmatized as the environmental villain of Canada’s petroleum industry, the oil sands sector would have every reason to think these were the worst of times.

Not quite.

The pace of new and expanded operations is gathering momentum, powered largely by foreign producers anxious to build their reserves and production, to gather technological know-how in the upstream development of unconventional hydrocarbon resources and to assemble market intelligence to add clout to their global acquisition strategies.

The objectives for China’s state-run companies, who have poured about C$30 billion into Canada’s energy sector over the past four years, were laid out at a Canadian Energy Research Institute oil conference.

But J.J. Chen, manager of business development with Hong Kong-controlled Husky Energy, also put a dent in common wisdom by declaring that importing crude oil from Canada is not on the near-term list of benefits for China.

“For China, there is no shortage of sources of crude oil imports,” he said.

“Canadian crude is a nice thing to have, but it is not mandatory. At present, the strategy for Chinese companies will be to buy Canadian crude more for (global) trading purposes and testing the markets.”

Chen also noted that the logjam in getting regulatory approvals for new pipelines connecting the oil sands with Asian markets is a further obstacle to sending Canadian crude across the Pacific.

“Over the longer-term, Chinese investments in Canada (are designed) to balance their basket of sourcing oil and gas supplies and diversify exposure to political and geographical risks and counter the depreciating U.S. dollar foreign reserves. There is also the possibility of Chinese oil companies offsetting their investments in Africa and South America,” he said.

Chen suggested that the current pricing of Western Canadian crudes does not support imports by China, but he predicted that over time Canadian oil will be in a position to compete with U.S. crudes.

Obstacles ahead

Of all the barriers facing oil sands operators the toughest obstacle is faced by Dover Operating — 40 percent owned by Athabasca Oil and 60 percent by Phoenix Energy Holdings (wholly owned by PetroChina) — which plans to build a five-stage 250,000 bpd thermal-recovery joint venture.

Dover is grappling with unresolved demands by the Fort McKay First Nation to establish a 13-mile buffer zone in an area that Athabasca Chief Executive Officer Sveinung Svarte said contains one of the richest bitumen deposits in the area.

That uncertainty has riled him because it stands in the way of finalizing the joint venture and freeing up C$1.32 billion that will be provided by PetroChina pending completion of a review by Alberta’s Energy Resources Conservation Board (to be renamed the Alberta Energy Regulator next month).

As a result, in just one day towards the end of April Athabasca’s shares plummeted 17 percent without any new announcements relating to the company.

The ERCB hearings have ended and Chief Financial Officer Brent Heagy told a conference call that in case a regulatory decision is held up, or a negative decision is rendered, Athabasca has a suite of back-up, including leaning on its credit facility or tapping public debt markets.

He said the put option underlying the asset sale to PetroChina could potentially be used as an anchor in some sort of secured financing.

Athabasca also needs the cash to continue with its Hangingstone project, as well as its light oil assets in the Kaybob area of northern Alberta.

The company said in February that regardless of uncertainties it is starting an environmental impact study as part of plans to expand Hangingstone by 70,000 bpd to 82,000 bpd in two stages of 35,000 bpd each, starting production in 2017 and 2018.

Positives for industry

•Pure-play MEG Energy, 17 percent owned by China National Offshore Oil Corp., expects to hike its output to 80,000 bpd by 2015 from its current 32,350 bpd, the bulk coming from a ramp-up at its Christina Lake development. President Bill McCaffery said 2013 will be a “year of transformation for MEG as our efforts in the upstream sector and across the company’s value chain are due to pay off.” He said the capital cost for the Christina Lake expansion remains within the budget of C$1.4 billion. McCaffery said planning is under way to add 41,000 bpd to Christina Lake beyond 2015, building towards the ultimate goal of 210,000 bpd. In addition, regulatory approval is due this year for the 120,000 bpd Surmont project.

•Canadian Natural Resources has made headway in shaking off protracted startup troubles at its Horizon operation and sticking to its goal of producing 250,000 bpd by 2017, up from its current 110,000 bpd. In addition, it is developing its in-situ Kirby assets to add 80,000 bpd and planning to include upgrading at the next two phases of Horizon. But company President Steve Laut made it clear that removing constraints to accessing U.S. Gulf Coast refineries makes Keystone XL essential.

•Royal Dutch Shell has received regulatory clearance for its Carmon Creek in-situ heavy oil project in northwestern Alberta and expects to make a final investment decision within 12 months on whether to proceed with the 80,000 bpd project.

•ConocoPhillips, although continuing to evaluate options for reducing its oil sands position, which includes a 16 billion barrel resource position, is in no hurry to make a choice, said Matt Fox, executive vice president of exploration and production. It is joint owner with Cenovus Energy of the Foster Creek and Christina Lake in-situ projects and owns 50 percent of the Surmont project in partnership with Total E&P Canada, plus 100 percent of undeveloped lands at the Thornbury, Clyden and Saleski leases. It said last year that three Indian companies had bid on some of the assets.

•Norway’s Statoil is counting on raising its oil sands production in 2017 if a final investment decision is made next year to double output from the Leismer steam-driven project in partnership with Thailand’s state-owned PTT Exploration and Production to 40,000 bpd and proceed with the new Cormer project to add another 20,000 bpd. The tentative startup dates are 2016-2017. Statoil is also working on plans to develop its holdings on the Thornbury, Hangingstone and South Leiser leases, each targeted to produce 40,000 bpd, raising the company’s volume to 200,000 bpd by 2025.